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Chapter 1 Assignment
1. Suppose you purchase 10 metric tons of May 2018 cocoa futures contract on March 27, 2022, at $2,554
per metric ton. What will your profit or loss be if cocoa prices turn out to be $2,681 per metric ton at
expiration? There are 10 metric tons per contract. (10)
2. What is the difference between a forward contract and a futures contract? Why do you think that futures
contracts are much more common? Are there any circumstances under which you might prefer to use
forwards instead of futures? Explain. (10)
3. Bubbling Crude Corporation, a large Texas oil producer, would like to hedge against adverse movements
in the price of oil because this is the firm’s primary source of revenue. What should the firm do? Provide at
least two reasons why it probably will not be possible to achieve a completely flat risk profile with respect
to oil prices. (10)
4. Use the option quote information shown here to answer the questions that follow. The stock is currently
selling for $114.
Option
Microsoft
Expiration
Strike Price
Call
Vol.
Put
Last
Vol.
Last
February
110
85
7.60
40
0.60
March
110
61
8.80
22
1.55
May
110
22
10.25
11
2.85
August
110
3
13.05
3
4.70
a. Suppose you buy 10 contracts of the February 110 call option. How much will you pay, ignoring
commissions? (10)
b. In part (a), suppose that Macrosoft stock is selling for $140 per share on the expiration date. Calculate
the pay-off and profit/Loss? What if the terminal stock price is $108? Explain. (10)
c. Suppose you buy 10 contracts of the August 110 put option. What is your maximum profit? On the
expiration date, Macrosoft is selling for $104 per share. Calculate pay-off and Profit/Loss. (10)
d. In part (c), suppose you sell 10 of the August 110 put contracts. What is your Profit/Loss if Macrosoft
is selling for $103 at expiration? (10)
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