Basic Derivatives - Problems
FIN165 Financial Markets Andrea Roncoroni c ESSEC Business School

Andrea Roncoroni (Finance Dept)

FIN165 Financial Markets

ESSEC Business School

1 / 19

Simple questions (1/2)
1.1 What is the di¤erence between a long forward position and a short forward position?

1.2 Explain carefully the di¤erence between hedging, speculation and arbitrage.

Andrea Roncoroni (Finance Dept)

FIN165 Financial Markets

ESSEC Business School

2 / 19

Simple questions (2/2)
1.3 What is the di¤erence between entering into a long forward contract when the forward prices is $50 and taking a long position in a call option with a strike price of $50?

1.4 Explain carefully the di¤erence between writing a call option and buying a put option

Andrea Roncoroni (Finance Dept)

FIN165 Financial Markets

ESSEC Business School

3 / 19

Forward P&L
1.5 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; (b) $0.0091 per yen?

Andrea Roncoroni (Finance Dept)

FIN165 Financial Markets

ESSEC Business School

4 / 19

Forward P&L
1.6 A trader enters into a short cotton futures contract when the futures prices is 50 cents per pound. The contract is for the delivery of 50,000 pounds. How much does the trader gain of lose if the cotton price at the end of the contract is (a) 48.20 cents per pound; (b) 51.30 cents per pound?

Andrea Roncoroni (Finance Dept)

FIN165 Financial Markets

ESSEC Business School

5 / 19

Option P&L
1.7 Suppose that you write a put contract on AOL Time Warner with a strike price of $40 and an expiration date in three months. The current stock price of AOL Time Warner is $41 and the contract is on 100 shares. What have you committed yourself to? How much could you gain or lose?

Andrea Roncoroni (Finance Dept)