Question 1 Identify the profit/loss on this transaction: You buy two call options on a share at an exercise price of $34 for a premium of $1.79 per share.You write a put on a share at an exercise...

Question 1 Identify the profit/loss on this transaction: You buy two call options on a share at an exercise price of $34 for a premium of $1.79 per share.You write a put on a share at an exercise price of $33 for a premium of $1.63. The price of the share goes to $60. All options have the same maturity date and are on the same underlying share. Answer a. Net Profit of $1.95 b. Net profit of $50.05 c. Net loss of $53.95 d. Net loss of $50.05 e. Net profit of $53.95 Question 2 In Australia the SPI future has a value of $25 per point of the index. If you go long the SPI at 4500 and the price closes for the day at 4510 then your account balance would Answer a. increase by $25 b. decrease by $25 c. increase by $250 d. not change because marking to market only occurs when you close out e. decrease by $250 Question 3 If the share price at the expiry of a call option is less than the exercise price, the call is worth: Answer a. the market price of the share. b. the difference between the exercise price and the share price. c. an undefined amount. d. the original price paid for the option. e. zero. Question 4 Which of the following items are correct with respect to Futures? There may be more than one correct answer. Answer I. The futures clearing house guarantees all its futures contracts whether they are long or short. II. An important difference between a forwards and a futures is that futures are marked to market. III. Most futures contracts do not go to delivery. IV. An important function of a futures clearing house is to minimise default V. Futures can be used to hedge risk, speculate on price and to perform riskless arbitrage. Question 5 Which of the following enables an arbitrage profit to be made (excluding transaction costs) from a call option if the market price of the underlying share is $5.50, the price of the call is $1.50, and the exercise price is $3.80? Answer a. Buy a put option, exercise it and buy the underlying share. b. Sell a put option now and realise the profit. c. Buy the call option, exercise it and sell the underlying share. d. Buy a call option and hold onto it until expiry. e. An arbitrage profit cannot be made. Question 6 What is the payoff of a long call option (bought) with an exercise price of $15.00, if the underlying share price is $16.50, at the expiry date of the option? Answer a. 16.5 b. Zero c. $1.00 d. $15.00 e. $1.50 Question 7 For a long put option (bought) with an exercise price of $9.50, the maximum payoff is: Answer a. $5.00 b. infinite. c. not enough information given to be able to calculte d. Zero e. $9.50 Question 8 The higher the risk free rate, the: Answer a. lower the value of the call option b. higher the value of the call option c. value of the option does not change d. higher the value of the put option e. value of the call is one-half the value of a put Question 9 It is January. Lan-wool is a manufacturer of woolen jumpers. Mary, the manager of Lan-wool, will need to purchase 7,500kg of wool in September. Mary is worried the market price of wool may increase in the future. What sort of transactions should Mary undertake in order to hedge her risk using futures? Answer a. Take a long position in September wool futures in January, close out by taking a short position in wool futures in September and buy wool in the marketplace in September. b. Take a short position in September wool futures in January, close out by taking a long position in wool futures in September and buy wool in the marketplace in September. c. Take a long position in the futures market in January fixing the price and take delivery of the contract in September. d. Take a short position in the futures market in January and deliver the contract in September. e. Take a long position in September wool futures in January, close out by taking a long position in wool futures in September and buy wool in the marketplace in September. Question 10 You are worried about the price of oil decreasing, as you are an oil supplier, and decide to hedge your risk by using futures contracts (you need 10 contracts, each for 1000 barrels). Based on the following information, what is your gain/loss on futures trading? And what is the effective price of oil per barrel from your hedging strategy? • Now it is May and the current market price is $125 a barrel • in May the October futures price is $120 a barrel • in September you need to close out from your futures contracts; the current market price for oil is $113 a barrel and the October futures price is $112 a barrel. Answer a. Gain on futures of $80,000 and effective price of $120 per barrel. b. Gain on futures of $80,000 and effective price of $121 per barrel. c. Loss on futures of $80,000 and effective price of $112.20 per barrel. d. Loss on futures of $50,000 and effective price of $112 per barrel. e. Gain on futures of $50,000 and effective price of $113 per barrel. Question 11 Identify the profit/loss on this transaction: You buy a call option on a share at an exercise price of $34 for a premium of $1.79 per share. The price of the share goes to $38. Answer a. Net profit of $5.79 b. Net loss of $2.21 c. Net loss of $5.79 d. Net profit of $2.21 e. zero profit/loss Question 12 Identify the profit/loss on this transaction: You write a put on a share at an exercise price of $33 for a premium of $1.63. The price of the share goes to $38 at maturity. Answer a. Net profit of $1.63 b. Net profit of $5.00 c. Net loss of $1.63 d. Net loss of $3.37 e. Net profit of $3.37