Seminar 3 questions
• Explain carefully the difference between hedging, speculation and arbitrage.
• Explain carefully the difference between selling a call option and buying a put option.
• When first issued, a stock provides funds for a company. Is the same true of a stock option? Discuss.
• Suppose that a March call option to buy a share for $50 costs $2.50 and is held until March. Under what circumstances will the holder of the option make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option.
• A US company expects to have to pay 1 million Canadian dollars (CAD) in 6 months. Explain how the exchange rate risk can be hedged using (a) a forward contract and (b) an option.
• Delta hedging:
Suppose your position is long 10 call options (1 call = 100 shares) of MSFT
If the option delta is 0.25, how many shares to be delta hedged?
And do you buy or sell the shares?
• If you are long 50 put options on AAPL with an option delta of 0.85, how many shares should you buy or sell to be delta neutral ?