Question 1

A(n)________ gives the holder the right to buy a stated number of shares at a specified price for a limited time.

Accepted Answer

A call option gives the holder the right to buy a specified number of shares at a specified price (known as the strike price) within a certain time period. This allows the holder to profit if the stock price rises above the strike price.

Question 2

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

Accepted Answer

The answer of How can a gold futures contract be...

Question 3

An investor would buy a ________ if he or she believes that the price of the underlying share or asset will fall in the near future.

Accepted Answer

A put option gives the buyer the right, but not the obligation, to sell an underlying share or asset at a specific price within a specific period of time. If the investor believes the price of the underlying asset will fall, they can buy a put option and sell the asset at the higher price they locked in, thereby making a profit. The other options listed do not provide a way to profit from a declining price of an underlying asset.

Question 4

A(n)________ gives the holder the right to sell a stated number of shares at a specified price for a limited time.

Accepted Answer

A put option, by definition, gives the holder the right but not the obligation, to sell a specified number of shares at a specified price (known as the exercise price or strike price) within a specified period of time (known as the expiration date or maturity date). If the share price falls below the strike price, the put option can be exercised to sell the shares at the higher strike price, thereby generating a profit for the holder.

Question 5

A(n)________ can be exercised only on the expiration date.

Accepted Answer

A European option can only be exercised on the expiration date. This is because the payoff of a European option is determined by the price of the underlying asset at the expiration date. In contrast, an American option can be exercised at any time before the expiration date.

Question 6

Ahmad bought put options on Wesfarmers with a striking price of $50.The option premium was $2.64.Just before the contract expired,Wesfarmers shares were at 51.39 each.Ahmad

Accepted Answer

Since the striking price is $50 and the share price just before the contract expired was $51.39, the option would not be exercised as it would result in a loss. Therefore, Ahmad would lose the option premium of $2.64 per share.

Question 7

Unlike the owner of a(n)________ contract,the owner of a(n)________ contract does not have to exercise it.

Accepted Answer

Futures contracts require both parties to fulfill the contract at a specific point in the future. Therefore, the owner of a futures contract does not have to exercise it since they are obligated to fulfill it regardless. On the other hand, options contracts give the owner the right but not the obligation to buy (call) or sell (put) an underlying asset at a certain price before a specific date. Therefore, the owner of an options contract has the choice to exercise it or not.

Question 8

The owner of a large,diversified stock portfolio could hedge against a steep decline in prices by

Accepted Answer

Buying put options on a share index allows the owner to sell the index at a predetermined price, providing a form of insurance against a decline in prices. The other options do not provide the same level of protection. Selling put options exposes the owner to potential losses if the index declines. Buying both call and put options (a straddle) can be expensive and may not provide adequate protection if the decline in prices is not significant.

Question 9

How can a currency futures contract be used as a hedge against a potentially dramatic appreciation of a foreign currency that an Australian company is expecting to convert into Australian dollars?

Accepted Answer

The answer of How can a currency futures contract be...

Question 10

You sold one July futures contract of pork bellies at $.59 per lb.One contract represents 40,000 lbs.of pork bellies.By the end of the day,the price had fallen to $.57 per lb.What was your profit or loss for the day?

Accepted Answer

The profit is calculated by the difference in price ($.59 - $.57 = $.02 per lb.) multiplied by the contract size (40,000 lbs.), resulting in a profit of $800.

Question 11

Mayspring Corporation ordinary shares is currently selling for $72.00 per share.A call option on Mayspring Corporation that expires in two months has an exercise price of $72.50.This call option is said to be

Accepted Answer

The answer of Mayspring Corporation ordinary shares is currently selling...

Question 12

Barco Corp.ordinary shares are currently selling for $36.50 per share.A call option on Barco shares costs $.75 per share on a normal contract of 100 shares.This option has an exercise price of $39 and expires in one month.What is the minimum value of this option?

Accepted Answer

The call option has an exercise price of $39, which is higher than the current market price of $36.50. Therefore, the option is out of the money and has no intrinsic value. The minimum value of this option is $0.

Question 13

Financial futures include

Accepted Answer

The answer of Financial futures include
...

Question 14

Erin wrote a put option on Wesfarmers shares with a striking price of $53 price per share.At the expiration date,Wesfarmers was selling for $50 per share.Which statement best describes the course of action that Erin should or must take?

Accepted Answer

When Erin wrote a put option, she agreed to buy Wesfarmers shares at $53 per share at expiration date. Since the market price is lower than the striking price, Erin is obliged to fulfill her contract and buy the Wesfarmers shares at $53 per share, even though the current market price is $50 per share. Therefore, the correct course of action for Erin is to exercise her option and buy the shares at the striking price of $53 per share.

Question 15

Futures contracts

Accepted Answer

Futures contracts can be used by financial managers to reduce risk, provide their holder with an opportunity to buy or sell an asset at some future time if the asset's value has changed in a manner favorable to the futures contract holder, and sustain a small change in value when there is a small change in the price of the underlying commodity. Therefore, Option D has all of the characteristics stated above.

Question 16

Ahmad bought call options on Rio Tinto with a striking price of $80.The option premium was $3.82.Just before the contract expired,Rio Tinto shares was $82 each.Ahmad

Accepted Answer

The answer of Ahmad bought call options on Rio Tinto...

Question 17

A call option on a share is a financial instrument defined by which of the following statements?

Accepted Answer

A call option gives the holder the right, but not the obligation, to buy the underlying asset (in this case, a share) at the specified price (also known as the exercise price) at a stated date in the future. Therefore, option C is the correct definition of a call option on a share. Option A refers to a put option, while option B and D both contain incorrect statements about the nature of a call option.

Question 18

The minimum value of a call option equals

Accepted Answer

The answer of The minimum value of a call option...

Question 19

A futures contract is a specialised form of a forward contract distinguished by a(n)

Accepted Answer

A futures contract is characterised by both an organised exchange (where trading takes place) and a clearinghouse (that acts as a counterparty to both sides of the trade to guarantee performance). Additionally, futures contracts are standardised in terms of quantity, quality, delivery date, and settlement method. They also have price limits and margin requirements to manage risk. Therefore, choice D is the correct answer.

Question 20

The price at which the share or asset may be purchased from (or sold to)the option writer is referred to as

Accepted Answer

The exercise or strike price is the price at which the option can be purchased from (or sold to) the option writer. The intrinsic value of the option refers to the difference between the exercise price and the market price of the underlying asset, while the option premium is the price paid for the option itself. Open interest refers to the total number of outstanding options contracts for a particular security.

Quiz 20: Corporate Risk Management

A(n) ________ gives the holder the right to buy a stated number of shares at a specified price for a limited time.

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

An investor would buy a ________ if he or she believes that the price of the underlying share or asset will fall in the near future.

A(n) ________ gives the holder the right to sell a stated number of shares at a specified price for a limited time.

A(n) ________ can be exercised only on the expiration date.

Ahmad bought put options on Wesfarmers with a striking price of $50.The option premium was $2.64.Just before the contract expired,Wesfarmers shares were at 51.39 each.Ahmad

Unlike the owner of a(n) contract,the owner of a(n) contract does not have to exercise it.

The owner of a large,diversified stock portfolio could hedge against a steep decline in prices by

How can a currency futures contract be used as a hedge against a potentially dramatic appreciation of a foreign currency that an Australian company is expecting to convert into Australian dollars?

You sold one July futures contract of pork bellies at $.59 per lb.One contract represents 40,000 lbs.of pork bellies.By the end of the day,the price had fallen to $.57 per lb.What was your profit or loss for the day?

Mayspring Corporation ordinary shares is currently selling for $72.00 per share.A call option on Mayspring Corporation that expires in two months has an exercise price of $72.50.This call option is said to be

Barco Corp.ordinary shares are currently selling for $36.50 per share.A call option on Barco shares costs $.75 per share on a normal contract of 100 shares.This option has an exercise price of $39 and expires in one month.What is the minimum value of this option?

Financial futures include

Erin wrote a put option on Wesfarmers shares with a striking price of $53 price per share.At the expiration date,Wesfarmers was selling for $50 per share.Which statement best describes the course of action that Erin should or must take?

Futures contracts

Ahmad bought call options on Rio Tinto with a striking price of $80.The option premium was $3.82.Just before the contract expired,Rio Tinto shares was $82 each.Ahmad

A call option on a share is a financial instrument defined by which of the following statements?

The minimum value of a call option equals

A futures contract is a specialised form of a forward contract distinguished by a(n)

The price at which the share or asset may be purchased from (or sold to) the option writer is referred to as

Quiz 20: Corporate Risk Management

A(n) ________ gives the holder the right to buy a stated number of shares at a specified price for a limited time.

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

An investor would buy a ________ if he or she believes that the price of the underlying share or asset will fall in the near future.

A(n) ________ gives the holder the right to sell a stated number of shares at a specified price for a limited time.

A(n) ________ can be exercised only on the expiration date.

Ahmad bought put options on Wesfarmers with a striking price of $50.The option premium was $2.64.Just before the contract expired,Wesfarmers shares were at 51.39 each.Ahmad

Unlike the owner of a(n) ________ contract,the owner of a(n) ________ contract does not have to exercise it.

The owner of a large,diversified stock portfolio could hedge against a steep decline in prices by

How can a currency futures contract be used as a hedge against a potentially dramatic appreciation of a foreign currency that an Australian company is expecting to convert into Australian dollars?

You sold one July futures contract of pork bellies at $.59 per lb.One contract represents 40,000 lbs.of pork bellies.By the end of the day,the price had fallen to $.57 per lb.What was your profit or loss for the day?

Mayspring Corporation ordinary shares is currently selling for $72.00 per share.A call option on Mayspring Corporation that expires in two months has an exercise price of $72.50.This call option is said to be

Barco Corp.ordinary shares are currently selling for $36.50 per share.A call option on Barco shares costs $.75 per share on a normal contract of 100 shares.This option has an exercise price of $39 and expires in one month.What is the minimum value of this option?

Financial futures include

Erin wrote a put option on Wesfarmers shares with a striking price of $53 price per share.At the expiration date,Wesfarmers was selling for $50 per share.Which statement best describes the course of action that Erin should or must take?

Futures contracts

Ahmad bought call options on Rio Tinto with a striking price of $80.The option premium was $3.82.Just before the contract expired,Rio Tinto shares was $82 each.Ahmad

A call option on a share is a financial instrument defined by which of the following statements?

The minimum value of a call option equals

A futures contract is a specialised form of a forward contract distinguished by a(n)

The price at which the share or asset may be purchased from (or sold to) the option writer is referred to as

Unlike the owner of a(n) contract,the owner of a(n) contract does not have to exercise it.