Question 7 (10 marks)

a) An investor buys a put option with a strike price of $45 for $6. What is the investors maximum gain and maximum loss? (2 marks)

b) In January, an investor enters into a long futures contract to buy 100 oz of gold at $1,860 per oz in April. What would be the investors gain or loss if the price of gold is as follows in April?

i) $1,950 per oz (1 mark)

ii) $1,750 per oz (1 mark)

c) You own a call option on a Brambles share with an exercise price of $12. The option costs $0.50. The option will expire in exactly six months time.

i) If the share is trading at $9 in six months, what will be the profit of the call? (1 mark)

ii) If the share is trading at $18 in six months, what will be the profit of the call? (1 mark)

iii) Draw a profit diagram showing the profit of the call as a function of the share price at expiration. (2 marks)

d) A U.S. company expects to receive 1 million Canadian dollars in six months. Explain how the exchange rate risk can be hedged using (i) a forward contract; and (ii) an option. (2 marks)