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Derivatives-Practice Questions-Students-BFSI-2020-21

The document contains practice questions about derivatives including forwards, futures, options, hedging, and speculation. Questions cover topics such as the difference between long and short forward positions, hedging versus speculation versus arbitrage, differences between forwards, calls, and puts, and how gains and losses are calculated on futures and forward contracts under different price scenarios.

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Sarah Shaikh
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51 views2 pages

Derivatives-Practice Questions-Students-BFSI-2020-21

The document contains practice questions about derivatives including forwards, futures, options, hedging, and speculation. Questions cover topics such as the difference between long and short forward positions, hedging versus speculation versus arbitrage, differences between forwards, calls, and puts, and how gains and losses are calculated on futures and forward contracts under different price scenarios.

Uploaded by

Sarah Shaikh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Practice Questions - Derivatives

1. What is the difference between a long forward position and a short forward position?

2. Explain carefully the difference between hedging, speculation, and arbitrage.

3. What is the difference between entering into a long forward contract when the forward price is
$50 and taking a long position in a call option with a strike price of $50?

4. Explain carefully the difference between selling a call option and buying a put option.

5. An investor enters into a short forward contract to sell 100,000 British pounds for US dollars at an
exchange rate of 1.4000 US dollars per pound. How much does the investor gain or lose if the
exchange rate at the end of the contract is (a) 1.3900 and (b) 1.4200?

6. A trader enters into a short cotton futures contract when the futures price is 50 cents per pound.
The contract is for the delivery of 50,000 pounds. How much does the trader gain or lose if the
cotton price at the end of the contract is (a) 48.20 cents per pound and (b) 51.30 cents per pound?

7. Suppose that you write a put contract with a strike price of $40 and an expiration date in 3
months. The current stock price is $41 and the contract is on 100 shares. What have you committed
yourself to? How much could you gain or lose?

9. You would like to speculate on a rise in the price of a certain stock. The current stock price is $29
and a 3-month call with a strike price of $30 costs $2.90. You have $5,800 to invest. Identify two
alternative investment strategies, one in the stock and the other in an option on the stock. What are
the potential gains and losses from each?
10. Suppose that you own 5,000 shares worth $25 each. How can put options be used to provide you
with insurance against a decline in the value of your holding over the next 4 months?

11. When first issued, a stock provides funds for a company. Is the same true of an option on a
stock? Discuss.

12. Explain why a futures contract can be used for either speculation or hedging.

13. Suppose that a March call option to buy a share for $50 costs $2.50 and is held until March.
Under what circumstances will the holder of the option make a profit? Under what circumstances
will the option be exercised? Draw a diagram illustrating how the profit from a long position in the
option depends on the stock price at maturity of the option.

17. A company knows that it is due to receive a certain amount of a foreign currency in 4 months.
What type of option contract is appropriate for hedging?

18. A US company expects to have to pay 1 million Canadian dollars in 6 months. Explain how the
exchange rate risk can be hedged using (a) a forward contract and (b) an option.

19. A trader enters into a short forward contract on 100 million yen. The forward exchange rate is
$0.0080 per yen. How much does the trader gain or lose if the exchange rate at the end of the
contract is (a) $0.0074 per yen and (b) $0.0091 per yen?

21. ‘‘Options and futures are zero-sum games.’’ What do you think is meant by this?

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