Chapter 09 – Derivatives: Futures, Options, and Swaps
96. Explain how the clearing corporation reduces the risk it faces in the futures market
through the use of margin accounts and marking-to–market.
97. We have a futures contract for the purchase of 10,000 bushels of wheat at $3.00 per
bushel. If the price of wheat were to increase to $3.50, explain what happens to the parties
involved in the contract in terms of marking to market. Be sure to identify who is long and
short and specifically how much is transferred.
Chapter 09 – Derivatives: Futures, Options, and Swaps
98. A lender obtains funds from depositors by offering short-term interest rates on savings
accounts. The lender uses these funds to make longer-term installment loans. Explain how the
lender might make use of the futures market to hedge the risk taken.
99. How can we link the lack of futures markets in poor countries to the fact that farmers in
poor countries are likely to remain poor?
Chapter 09 – Derivatives: Futures, Options, and Swaps
100. What is the process that makes sure the market price of an underlying asset equals the
price of a futures contract at the settlement date? Provide an example.
101. Consider a call option; in terms of the option writer and option holder, who is the buyer?
Who is the seller? Finally, who has the option? Explain.
Chapter 09 – Derivatives: Futures, Options, and Swaps
102. With a put option, what specifically does the option holder receive for the price paid for
the option?
103. Describe the condition that would have a call option in the money. Now describe the
condition that has a put option out of the money.
104. Explain the difference between American and European options.
Chapter 09 – Derivatives: Futures, Options, and Swaps
105. If the option holder is the individual with the options, why is anyone an option writer?
106. 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?
107. 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?
Chapter 09 – Derivatives: Futures, Options, and Swaps
108. Why does the time value of the option tend to vary directly with the time to expiration?
109. What would be the value of an option on a stock that sells at a fixed price with a standard
deviation of zero? Explain.
110. Identify four factors that will cause the value of call options to increase.
Chapter 09 – Derivatives: Futures, Options, and Swaps
111. Identify four factors that will cause the value of put options to decrease.
112. 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?
113. 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?
Chapter 09 – Derivatives: Futures, Options, and Swaps
114. Why do government debt managers often use interest-rate swaps?
115. Explain the concept of notional principal used in swaps.
116. How does trading in over-the-counter markets increase systemic risk?
Chapter 09 – Derivatives: Futures, Options, and Swaps
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117. What is a credit-default swap?
118. How did CDS contribute to the financial crisis of 2007-2009?
Essay Questions
Chapter 09 – Derivatives: Futures, Options, and Swaps
119. 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.
120. A futures contract are enhanced forward contract with some important differences.
Explain.
A futures contract is a forward contract that has been standardized and which is sold through
an organized exchange. Forward contracts generally are private agreements between two
parties and as a result are customized and therefore difficult to sell.
Chapter 09 – Derivatives: Futures, Options, and Swaps
121. Explain the popularity of options in the sense of the potential gains and losses they offer.
122. 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.
Chapter 09 – Derivatives: Futures, Options, and Swaps
123. What questions should an employee ask before accepting options as part of or instead of
a salary?