Question 1

Suppose you purchase a call option to purchase General Motors common stock at $80 per share in March. The current price of GM stock is $83 and the time value of the option is $5. What is the intrinsic value of the option? As the expiration date approaches, what will happen to the size of the time value of the option?

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Question 2

Identify four factors that will cause the value of call options to increase.

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Question 3

Explain the difference between American and European options.

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Question 4

What would be the value of an option on a stock that sells at a fixed price with a standard deviation of zero? Explain.

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Question 5

If the current closing price in the stock of XYZ, Inc. is $87.50 and the July expiration put options with a strike price of $80 are selling for $1.05, what is the intrinsic value of the option? What is the option premium?

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Question 6

Suppose you purchase a put option to sell General Motors common stock at $80 per share in March. The current price of GM stock is $83 and the time value of the option is $1. What is the intrinsic value of the option?

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Question 7

If the option holder is the individual with the options, why is anyone an option writer?

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Question 8

What is a credit-default swap?

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Question 9

Explain why for speculation, the purchase of an option may be more attractive than a futures contract or the outright purchase of the underlying asset.

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Question 10

Explain the concept of notional principal used in swaps.

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Question 11

Identify four factors that will cause the value of put options to decrease.

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Question 12

How does trading in over-the-counter markets increase systemic risk?

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Question 13

Imagine a baker who has the opportunity to bid on a contract to supply a local military base with bread for an entire year. The problem is the baker must commit to a price today and hold to that price for the entire year. Identify the risk faced by the baker, and explain how the use of a futures contract could transfer the risk.

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Question 14

Explain the popularity of options in the sense of the potential gains and losses they offer.

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Question 15

Why do government debt managers often use interest-rate swaps?

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Question 16

If the current closing price of the stock of XYZ, Inc. is $87.50 and the July expiration call options with a strike price of $80 are selling for $9.45, what is the intrinsic value of the option? What is the time value of the option?

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Question 17

Why does the time value of the option tend to vary directly with the time to expiration?

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Question 18

What questions should an employee ask before accepting options as part of or instead of a salary?

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Question 19

A futures contract is a forward contract with some important differences. Explain.

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Question 20

How did CDS' contribute to the financial crisis of 2007-2009?

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Quiz 9: Derivatives: Futures, Options, and Swaps