Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 23, Problem 3QP
Futures Options Quotes [LO4] Refer to Table 23.2 in the text to answer this question. Suppose you purchase the June 2014 call option on corn futures with a strike price of $5.05. Assume you purchased the future at the last price. How much does your option cost per bushel of com? What is the total cost? Suppose the price of com futures is $4.96 per bushel at expiration of the option contract. What is your net profit or loss from this position? What if com futures prices are $5.24 per bushel at expiration?
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?Q.19
Consider a European call option with
the following parameters:
Assuming a risk-free annual rate of
8%, what is the probability that the
option will be exercised in a risk-
neutral world? (If required, use the
table at the beginning of the
document for statistical
calculations.)
Strike price
USD 48
Expiration
6 months
Underlying's Price
USD 50
Annual volatility 25%
A
B
C
0.70
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0.6443
D 0.3668
Q roshu
Suppose that a futures price is currently $42. A European call option and a European put option on the futures with a strike price of $40 and maturity in two months are both priced at $3 and $2 respectively in the market. The continuously compounded risk-free rate of interest is 5% per annum. Use the put-call parity condition to show that an arbitrage opportunity exists. Explain what position could be set up to exploit it. (Show all relevant calculations to support your argument. For example, your calculations should include what strategy an arbitrageur could follow in order to lock in a risk-free profit from the arbitrage strategy, as well as the arbitrageur’s net profit from the strategy).
The January 2023 S&P 500 cash index is 3950 points while the S&P 500 futures March 2023 index is 4000 and the contract value of each index point is $150. You are convinced the futures market will fall 20% by expiry. You are only prepared to buy or sell one futures contract.
(i) Will you buy or sell a contract in the futures market? (ii) What is your profit (+) in dollars if you are correct? (iii) What is your profit (+)/loss (-) if the futures price on expiry is 4400?
(iv) What is your profit (+)/loss (-) if the futures price on expiry is 3700?
(v) Explain how a fund manager that is manging $100 million pension fund that track the S&P 500 index who is concerned the spot index will be 3200 on date of expiration of the futures contract in March 2023 can hedge the risk to the pension fund. Explain the net position if on the March expiration the index reads 3000 or 4500.
Chapter 23 Solutions
Fundamentals of Corporate Finance
Ch. 23.1 - Prob. 23.1ACQCh. 23.1 - Prob. 23.1BCQCh. 23.2 - Prob. 23.2ACQCh. 23.2 - Prob. 23.2BCQCh. 23.3 - What is a forward contract? Describe the payoff...Ch. 23.3 - Prob. 23.3BCQCh. 23.4 - Prob. 23.4ACQCh. 23.4 - Prob. 23.4BCQCh. 23.5 - Prob. 23.5ACQCh. 23.5 - Prob. 23.5BCQ
Ch. 23.5 - Prob. 23.5CCQCh. 23.6 - What is a futures option?Ch. 23.6 - Prob. 23.6CCQCh. 23 - Keith is preparing a graph that compares the value...Ch. 23 - Prob. 23.3CTFCh. 23 - Prob. 23.6CTFCh. 23 - Prob. 1CRCTCh. 23 - Prob. 2CRCTCh. 23 - Prob. 3CRCTCh. 23 - Prob. 4CRCTCh. 23 - Prob. 5CRCTCh. 23 - Prob. 6CRCTCh. 23 - Options [LO4] Explain why a put option on a bond...Ch. 23 - Prob. 8CRCTCh. 23 - Prob. 9CRCTCh. 23 - Prob. 10CRCTCh. 23 - Prob. 11CRCTCh. 23 - Hedging Exchange Rate Risk [LO2] If a U.S. company...Ch. 23 - Hedging Strategies [LO1] For the following...Ch. 23 - Prob. 14CRCTCh. 23 - Prob. 15CRCTCh. 23 - Prob. 16CRCTCh. 23 - Prob. 1QPCh. 23 - Prob. 2QPCh. 23 - Futures Options Quotes [LO4] Refer to Table 23.2...Ch. 23 - Prob. 4QPCh. 23 - Futures Options Quotes [LO4] Refer to Table 23.2...Ch. 23 - Prob. 6QPCh. 23 - Prob. 7QPCh. 23 - Interest Rate Swaps [LO3] ABC Company and XYZ...Ch. 23 - Prob. 9QPCh. 23 - Prob. 10QPCh. 23 - Prob. 1MCh. 23 - Prob. 2MCh. 23 - Prob. 3MCh. 23 - Prob. 4MCh. 23 - Prob. 5MCh. 23 - Are there any possible risks Joi faces in using...
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