Chapter26 Fm

Chapter 26: Derivatives and Hedging Risk

26.1 The price quote is $4.05 per bushel and each contract is for 5,000 bushels, so the initial contract value is:

Initial contract value = ($4.05 per bushel.)(5,000 bushels per contract) = $20,250

At a final price of $4.17 per bushel, the value of the position is:

Final contract value = ($4.17 per bushel)(5,000 bushels per contract) = $20,850

Since this is a long position, there is a net gain of:

$20,850 – 20,250 = $600

26.2 The price quote is $3.7075 per bushel and each contract is for 5,000 bushels, so the initial

contract value is:

Initial contract value = ($3.7075 per bushel)(5,000 bushels per contract) = $18,537.50

At a final price of $4.04 per bushel, the value of the position is:

Final contract value = ($4.04 per bushel)(5,000 bushels per contract) = $20,200

Since this is a short position, there is a net loss of:

$20,200 – 18,537.50 = $1,662.50 per contract

Since you sold five contracts, the net loss is:

Net loss = 5 x $1,662.50 = $8,315.50

At a final price of $4.90 per bushel, the value of the position is:

Final contract value = ($4.90 per bushel)(5,000 bushels per contract) = $24,500

Since this is a short position, there is a net loss of

$24,500 – 18,537.50 = $5,962.50

Since you sold five contracts, the net gain is:

Net loss = 5 x $5,962.50 = $29,812.50

With a short position, you make a profit when the price falls, and incur a loss when the price rises.

26.3 The call options give the manager the right to purchase oil futures contracts at a futures price of $35 per barrel. The manager will exercise the option if the price rises above $35. Selling put options obligates the manager to buy oil futures contracts at a futures price of $35 per barrel. The put holder will exercise the option if the price falls below $35. The payoffs per barrel are:

Oil...