Unit 16 (1) Flashcards
What price is a warrant offered at?
Higher than current market price. Time length is much longer than rights.
What would you write covered calls for?
To generate income and limited downside protection in the amount of the premium received.
How does the sweetener effect the rate of a bond?
The rate will be lower due to the warrant attached as a sweetener.
You buy a 1000 bushel wheat future for fifty cents per bushel. At expiration the settlement is 45 cents a bushel. What is your profit or loss?
A loss of $50. Five cents a bushel times 1000
When is a future a security?
When the underlying asset is a security. An equity option is always a security.
What are the two most important factors in determining the price of a derivative?
The price movement or volatility of the underlying security and the time to expiration
Which has standardized terms? Futures or forwards?
Futures have standardized terms and can be traded. Forwards are negotiated separately
You make soybean oil and are concerned that the price of soybeans is going to increase over the next 6 months, what kind of hedge do you use?
A long hedge. In this case “long” isn’t referring to the time period, it’s referring to the fact that the price is rising so the hedge would be long. If the prices were going to decline it would be a short hedge.
If the question is about a producer with crops to deliver
The answer will be about forwards. If it were a speculator, it would be futures
If a question talks about a crop that will be hit with a drought, or production will suffer - what will happen to crop prices?
Prices will go up because there will be limited supply, remember that when determining your answer
A farmer entered into a forward contract to sell his produce at $2.25 per bushel. At expiration, the price was $2 per bushel. The farmer receives?
$2.25 per bushel
