we have future contracts in treasury binds
4. It has been said that, from an investor's perspective, a long position in a call option represents the "good half of a long position in a forward contract. Explain what is meant by this statement. Also, describe what the "bad half of the long forward position would have to be for this statement to be true. . CHAPTER 21 Forward and Futures Contracts (Page 781) QUESTIONS TO ANSWER 1. We have futures contracts on Treasury bonds, but we do not have futures contracts on individual corporate bonds. We have cattle and hog futures but no chicken futures. Explain why the market has developed in this manner. What do you think are the most important characteristics for the success of a new futures contract concept? 2. "Hedgers trade price risk for basis risk." What is meant by this statement? In particular, explain the concept of the basis in a hedge transaction and how forward and futures contracts can be selected to minimize risk. 3. Since their introduction, stock index futures contracts have become very popular and are now widely traded by finance professionals. Many factors, including (1) the current price of the underlying stock index, (2) the time to contract maturity, and (3) the dividends paid to the stocks in the underlying index, will affect the settlement price of a stock index futures contract. What is the fourth primary factor involved in stock index futures contract pricing, and how does this factor affect settlement prices? . CHAPTER 22 Option Contracts (Page 821) QUESTIONS TO ANSWER 1. Straddles have been described as "volatility plays. Explain what this means for both long and short straddle positions. 2. Given the fact that volatility is a primary factor in how options are priced, under what conditions might an investor who believes that markets are efficient ever want to create a straddle? 3. Put-call-forward parity and range forward positions both involve the purchase of a call option and the sale of a put option (or vice versa) on the same underlying asset. Describe the relationship between these two trading strategies. Is one a special case of the other? 4. "Although options are risky investments, they are valued by virtue of their ability to convert the underlying asset into a synthetic risk-free security." Explain what this statement means, being sure to describe the basic three-step process for valuing option contracts. . CHAPTER 23 Swap Contracts, Convertible Securities, and Other Embedded Derivatives (Page 867) QUESTIONS TO ANSWER 1. Explain how an interest rate swap can be viewed as either a series of forward rate agreements, a pair of bond transactions, or a pair of option agreements. 2. We have seen that equity warrants are not as valuable as an otherwise identical call option on the stock of the same company. Explain why this must be the case. Also, what is the incentive for a firm to issue a warrant rather than issuing stock directly? 3. Total return swaps and credit default swaps were both developed as tools to help investors manage credit risk. In practice, however, credit default swaps are used far more widely. Compare the relevant features of both derivative agreements, and explain the reason for this difference in popularity
