Q.

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 option premium is
$5. What is the intrinsic value of the option? As the expiration date approaches, what will
happen to the size of option premium?
Answer: The intrinsic value of an option is equal to the difference between the current
market price and the strike price, which in this case is $83 - $80, or $3. The option
premium at expiration is zero since the option value equals the intrinsic value.
Q.

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 option premium is $1.
What is the intrinsic value of the option?
Answer: In this case the intrinsic value of the option is zero, the intrinsic value of a put
option is the strike price less the price of the underlying asset, which in this case is a
negative 3; however an option will never have an intrinsic value less than zero since the
option doesn't have to be exercised.

Q.

What would be the value of an option on a stock that sells at a fixed price with a standard
deviation of zero? Explain.
Answer: A stock that has no volatility in its price has an option that will never pay off, so
no one would have any interest in owning it and the options would be worthless so they
would not exist. In order for options to have value, the price of the underlying asset must
have some volatility to it, (a standard deviation equal to something other than zero).

.
Q.

Identify four factors that will cause the value of call options to increase.
Answer: Call options will increase in value if there is a decrease in the strike price; if
there is an increase in the market price of the underlying asset, if there is an increase in
the time to expiration, or if there is an increase in the volatility in the price of the
underlying asset.

Q.

Identify four factors that will cause the value of put options to decrease.
Answer: Put options will decrease in value if there is a decrease in the strike price, if
there is an increase in the market price of the underlying asset, if there is a decrease in
the time to maturity, or if there is a decrease in the volatility in the price of the underlying
asset.
Definition of Option, Swaps, Futures and Forwards

Q.
Vinnick, an American company purchase goods from santos, a Spanish company, on 15
May on 3 months credit for 600,000.
Vinnick is unsure in which direction exchange rates will moves so has decided to buy option to
hedge the contract for 10,000 option at .07700 are as follows
Calls
July
2.55

August
3.57

Puts
September
4.01

July
1.25

August
2.31

The current spot rate is 0.7800.

Required
Calculate the dollar cost of the transaction if the spot rate in August is:
(a) 0.7500
(b) 0.8000

September
2.90

Q.
You have purchased the following futures contract today at the settlement price listed in
the Wall Street Journal. Answer the questions below regarding the contract.

Requirement:
(A) What is the total value of the futures contract?
(B) If there is a 10% margin requirement how much do you have to deposit?
(C) suppose the price of the futures contract changes as shown in the following table.
(D) Enter the relevant information into the table. Show your calculations.

The total value of the contract is $9,174, as shown in the table. If there is a 10% margin
requirement, you will have to deposit $917.40 in cash or securities.

Goodcredit has given a high credit rating. It

can borrow at a fixed rate of 11% or a at a
variable interest rate equal to LIBOR, which
also happens to be 11% at the moment. It
would like to borrow at variable rate.
Secondtier is a company with a lower credit
rating which can borrow at a fixed rate
12.5% or at a variable rate of LIBOR plus
0.5%. It would like to borrow at a fixed rate.