If you want to trade gold con tracts, you should see how futures options work.
You think that the price of gold will go up over the next four or five months.
The required initial margin is $4,125 and you can enter into the August 2016 futures contract to buy gold.
A futures call option with a $1,160 strike price is currently being quoted at $9.80.
The total cost of this option is 100 because the underlying futures contract covers 100 ounces of gold.
The call is an in-the-money option because the market price of gold exceeds the exercise price.
If the value of the gold futures contract increases to $1,182.54 an ounce by the end of the year, and if the value of the gold futures contract decreases to $1,139.75 an ounce, the table shows what will happen to the investments.
The daily last, open, high, and low prices, as well as the prior settle and strike price, are included in the quotation for call and put options on corn futures contracts.
The change in price from the previous day's closing price to the current day's last price, the current day's volume, and the Hi/Lo limit are also included.
The futures option provides a superior upside rate of return but also a reduced exposure to loss since the maximum loss is limited to the price of the options.
Investment opportunities can be found in futures options.
Only knowledgeable commodities and financial futures investors should use them.
Discuss how stock index futures can be used.
You should know what to know after reading this chapter.
Large amounts of the underlying commodity or financial instrument are controlled by futures contracts.
They can produce wide price swings and attractive rates of return.
All trading in the futures market is done on margin.
A speculator's profit is derived from the wide price fluctuations that occur in the market.
Hedgers gain protection against price movements.
Problem P15.1 was focused on agricultural products.
The futures contracts behave the same as the prices of commodities go up and down.
If the price of corn goes up, the value of corn futures contracts goes up as well.
Speculation, spreading, Video Learning Aid for and hedging are some of the trading strategies used with commodities contracts.
Regardless of whether investors are in a long or short position, they have only one source of return from commodities and financial futures: appreciation in the price of the contract.
The rate of return on invested capital is used to assess the profitability of a futures transaction.
The futures market is where both are traded.
The volume of trading in financial futures surpasses that of commodities.
Currency futures, interest rate futures, and stock index futures are the major types of financial futures.
Various types of debt instruments are involved in interest rate futures.
Broad movements in the stock market are pegged to stock index futures.
These securities can be used for a variety of purposes.
Special appeal hedges against other security positions.
Bond portfolios can be protected against a jump in market interest rates by using interest rate futures.
Currency futures are used to hedge foreign currency exposure.
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MyFinanceLab will give you further practice, as well as videos, animations, and guided solutions.
Three of the biggest U.S. commodities exchanges were identified in this chapter.
In the United States, other U.S. exchanges and foreign commodities exchanges are closely followed.
The name of the exchange on which a particular contract is traded is included in futures quotes.
The value of commodities and financial futures contracts can be found using settlement or closing prices.
Current prices and margin requirements of futures contracts in the questions and problems below were established to make computations simpler and do not reflect current market conditions.
The profit and loss you would make in each of the futures transactions listed in the Australian futures market is based on the following information.
You buy five Eastern Australian Wheat futures at $266 and sell them one month later at $271.5.
You buy 10 contracts of ASX SPI 200 index futures and sell them two months later.
You can short sell two contracts of Eastern Australia Feed Barley for $231, but the price drops to $210.
You can buy and sell 10-year government bond futures at the same time.
You short sell S&P/ASX 200 VIX futures at 24.45 and the price goes up to $28 a month later.
You buy five contracts of AUD futures at a quote of 0.71 and sell them a few months later at 0.73.
Josh Rink is a commodities investor.
He recently sold cotton at a price of $0.58 a pound.
Mark has been working at his family's business house since he was young, which is related to growing and selling Eastern Australia Canola.
He decided to look into futures markets to protect his profits after being named president of the business.
The Eastern Australia Canola futures are quoted at 557.50 and have a contract size of 20 metric tons.
You purchase four contracts for April delivery because you decided to act on your hunches.
You have to put down 10%.
Mark buys two contracts in the Australian dollar.
The price went up to $560.50 on the delivery date.
Taryn Arsenault is a commodities trader.
She is considering a short position in July oats.
In a couple of months, she thinks July oats should be trading at about 240.
You will receive $100,000 in two months from the estate of a relative.
If you want to invest this money in safe, interest-bearing instruments, you should purchase five-year Treasury notes.
You think interest rates are going to go down, and you will have to pay more in two months.
Reynolds has invested in the stock market for a long time.
She likes to short sell whenever the opportunity arises.
She is interested in the idea of being able to play the market as a whole and stock index futures in particular.
She decided to short sell some S&P 500 stock index futures because she thought the market was headed down.
She has to make a margin deposit of $19,688 for each contract if she shorts three contracts.
A wealthy investor has $500,000 in U.S. Treasury bonds.
The bonds are quoted at 105% of par.
The investor is worried that rates will go up over the next six months, and he wants to protect his bond portfolio.
He was advised by his broker to set up a hedge.
The contracts are currently trading at 112'06.
How would the investor set up this hedge?
Woods sold her company for several million dollars.
She put the money into the stock market.
A portfolio of bluechip stocks is worth over 3 million dollars today.
She's concerned about a weakness in the market for blue chips and wants to keep her portfolio intact.
She decided to hedge her position with six-month futures contracts on the Dow Jones Industrial Average.
How would she set up this hedge if she wanted to cover the entire $3.8 million in her portfolio?
Over the next six months, stock prices will fall and the value of the portfolio will go down to $3.3 million.
A futures contract for British pounds is quoted.
62,500 is the contract size for British pounds.
You have bought a futures contract.
The quote was 1.1636 for the contract.
The exchange quote was 1.1050 on the delivery date.
The European economy is heading into a deflationary period, and the European Central Bank is using different strategies to support growth in the Eurozone.
The US is on a sustained path to growth, with economic and employment data looking strong.
He wants to bet that the Euro will fall.
Jacques wants to make money from the increase in the price of European stocks.
He decided to buy a call option on an exchange traded fund since they have been volatile.
Fast-track investments: interest rate futures T. J. Patrick enjoys the excitement of commodities speculation.
T.J. was introduced to this market by his dad, who is a grain buyer for one of the leading food processors.
T.J. understands the enormous risks involved in commodities speculating but feels that he can afford to take a few chances because he is young.
T. J. is a principal in an industrial design firm.
He adds between $15,000 and $20,000 to his portfolio each year.
T. J. has started playing with financial futures.
He likes the price action of these investments and admits he is not an expert on interest rates.
Several months ago, T. J. met Vinnie Banano, a broker who specializes in financial futures.
T. J set up a trading account with Banano's of Portland after hearing what Vinnie had to say about interest rate futures.
T. J. was suggested to get into five-year Treasury note futures by Vinnie.
The short to intermediate sectors of the term structure would probably see the biggest jump in yields because of the Fed pushing up interest rates so much.
T.J. should short sell some T-note contracts.
The rates on these T-notes should go up by a full point and T.J. should short four contracts.
Each contract requires an initial margin deposit, so this would be a $5,400 investment.
T-note futures are currently being quoted at 103'16.
Determine the underlying value of the T-note futures contract.
Return on invested capital is calculated from this transaction.
What is your opinion of T?
Jim Pernelli and his wife, Polly, live in Augusta, Georgia.
The Pernellis are a two-income family.
Jim and Polly both have high-paying jobs.
Jim has been an avid investor in the stock market for a number of years and has built up a portfolio that is worth nearly $375,000.
High-quality, mid-cap growth stocks make up a large part of the Pernellis' portfolio.
The Pernellis add investment capital to their portfolio.
They have avoided short selling and only done a small amount of margin trading.
Jim is eager to protect the profit they have earned because of the substantial amount of capital appreciation in their portfolio.
Jim thinks the market has run its course and is about to enter a period of decline.
He doesn't believe the retreat will cover an especially long period of time because he has studied the market and economic news very carefully.
Most of the stocks in his portfolio will be adversely affected by these market conditions, although some will drop more in price than others.
Jim believes he knows the ins and outs of stock index futures and has been following them for a while.
Jim and Polly decided to use stock index futures as a way to protect their portfolio of common stocks.
S&P MidCap 400 futures contracts are priced at $500 and the index is quoted at 759.
Over the course of the market retreat, the Pernelli portfolio's value dropped 12%.
The Pernelli portfolio's value would decline by $52,000 if the S&P 400 futures contract moved from 769.40 to 691.40.
The hedge transaction's profit should be added to the stock portfolio's value.
The Pernellis could use futures options instead of futures contracts to set up the hedge.
If you put a put on the S&P MidCap 400 futures contract, it will be worth $500 more than the underlying S&P 400 futures contract.
There are no current cash flows associated with this financial asset.
The use of leverage and swings in prices make these instruments volatile.
With futures trading done on margin, small amounts of capital are needed to control large investment positions.
You might be interested in investing in oats futures contracts.
You could have purchased oats at the settlement price.
At the time of the initial transaction, 5.35% of the contract's value is required for investor capital to be deposited with a broker.
To answer questions about the investment in futures contracts, create a spreadsheet and model it.
You decide to sell and take your profit if the oats actually settled at 186.75.
The topics covered in Chapters 14 and 15 of this text include basic properties of options and futures, pricing characteristics, return behavior, and various option strategies.
Changing cash for physical assets
Consider a put with a strike price of $20 and a premium of $4.
Consider a put with a strike price of $20 and a premium of $4.
Both statements are correct.
Both statements are correct.
Compare an American call with a strike of 50 that expires in 90 days to an American call with a strike of 60 that expires in 120 days.
The underlying asset is selling.
Both statements are correct.
A call with a strike price of $40.00 is available on a stock that is currently trading for $35.
The risk-free rate of return on the call is 10%.
The lower bound on this call is 0.
An investor writes a call option for $3 with an exercise price of $100 on his stock.
The investor paid for the stock.
An investor paid $10 for an option that is currently $5.
Put option with an exercise price of $95.
The recent price per share is $50.
There are calls on Dragon with strikes of 45, $50, and $55.
The calls are priced at $8.75, $6.00, and $4.00.
If the investor buys 100 shares of Dragon at the current market price at the start of the strategy, then each call contract is for 100 shares of stock.
If the stock price goes up or goes down, the investor will close out the strategy in six months, which includes the sale of any stock not delivered against the exercise of the call.
If the closing price of Dragon stock in six months is $60, the profit to a covered call using the $50 strike call is closest to a.
Win Big, Inc.'s recent price per share is 50 euro cents.
Verna buys 100 shares.
To protect against a fall in price, Hillsborough buys one put, covering 100 shares of Win Big, with a strike price of euro 40.
The premium is 1 euro per share.
The strike price of the option and the market price of the bond have not yet been paid.
A mutual fund service that allows traditional and modern approaches and managing and shareholders to automatically send fixed amounts of controlling it to achieve its objectives; a worthwhile money from their paychecks or bank accounts into the activity that can result in superior returns.
A mutual fund service that markets by selecting stocks or other securities that will allow shareholders to earn high returns.
Financial ratios are used to measure capital gains income.
Debt securities issued by various agencies and stock prices reflect the average price of the U.S. government.
U.S. investors can hold shares of non-U.S. companies on request at no cost to existing and potential clients or trade them on U.S. stock exchanges.
They can be purchased at some websites.
The current liabilities and shareholders' equity are measured at a single point in price behavior of all shares traded on the New York Stock Exchange.
Typically, a deep-discount broker has a lot of weight on information that they have at hand, through which investors can execute trades electronically even when that information is not particularly relevant.
There is a stream of equal cash flows over time.
A transaction in which an investor simultaneously prices, investor pessimism, economic slowdown, and buys and sells identical assets at different prices to earn a government restraint.
A formal dispute-resolution process in which emotions and other subjective factors play in investment client and broker present their arguments before a panel, decisions.
The lowest price for a security was offered.
A scheme that involves dividing one's indicates how the price of a security responds to market portfolio into various asset classes to preserve capital by forces.
The highest price for a security is offered.
A bond issue is assigned to a customer by rating agencies.
Credit risk is associated with a particular bond issue.
The activity of charting price behavior and other simultaneously liquidates one bond holding and buys a market information and then uses the patterns these different issue to take its place.
An illegal and unethical practice that was engaged in if it were purchased and held to maturity was reported as a broker to increase commissions by causing excessive annual rate of return.
The common stock has a twice yearly yield.
Long-term debt instruments are issued by privileges and benefits.
The bond's price ignores interest.
The market in which the two sides of a contribution from investors are brought together is the open market.
Markets are held in trust by a third party and are usually associated with rising prices.
An indication of the current state of the bond whose holders are divided into classes based on economy, reflecting changes in total economic activity the length of investment desired The degree of uncertainty is associated with a first.
The returns owed to investors are reported in a financial report.
A negotiable instrument that gives the holder the right in a corporation, each share represents a fractional to buy securities at a stated price within a certain time ownership interest in the firm.
There is a feature that tells you whether or not a firm has a per-share basis.
The amount added to a bond's par value and deposit but also on any interest accumulated from one paid to investors when a bond is retired premature.
Equal to par value plus the call premium is the price the issuer must pay to retire a bond.
The model is used in the bond market before it is used in the stock market.
There is a formula plan for timing investment.
Payments made to mutual fund are transferred to or from the conservative portion shareholders that come from the profits that a fund makes as needed to maintain the target dollar amount.
The brokerage account of a minor requires a parent or guardian to be part of all transactions.
The general state of the economy is linked to the performance of stocks whose earnings and overall market amount are set by the market.
Put and call options can be purchased over the price of a commodity.
A mutual fund registered shareholder is entitled to receive a dividend.
The goal of the price throughout the day was to make quick profits.
The amount of money being borrowed.
The conversion feature on convertible securities allows funds to be lent in exchange for interest income.
There are stocks that can be converted into a convertible issue.
If securities were priced to sell on the basis of their value or converted into shares of common stock, they would trade for it.
A period of falling prices.
The life of a futures contract is determined by the time when a commodity must be feature permitting the holder to convert the security into delivered.
Common stock is displayed in securities that are structured to do so.
A fixed-income obligation with a feature or asset and that derive their value from the underlying allowing the investor to convert it into a specified security or asset.
A statistical measure of the relationship, if any, the economy, the market, the industry, the company, or a series of numbers representing data of any kind.
A measure of the degree of correlation is used to make transactions in more than one stock.
A method of earning interest on a security.
The interest earned is the result of difference in the stock price.
Buy orders at the desired price for a bond with a market value lower than par.
When finding exchange rates between the currencies of two countries, the risk caused by the varying currently on a similar investment is used.
Investment's risk that results from uncontrollable or traded commodities is similar to futures contracts on foreign currencies.
Put and call options are written on foreign land.
Measure the annual interest income a bond investment vehicle in a portfolio to increase returns or provide relative to its current market price
Senior bonds are secured by the mutual fund's security holdings.
There is ongoing ownership of a business.
A model is used to value the issuer's stock.
A mutual fund that emphasizes current is expected to produce; its three versions are zero-growth, income and capital preservation and invests primarily in constant-growth, and variable-growth.
Foreign bonds are denominated in dollars.
Firms make periodic payments to their issues.
Stock valuation has an immediate effect on the approach that uses projected dividends, earnings per share, and P/E underlying value of an investment.
A formula plan for timing investment is eligible for a declared dividend.
A security at fixed time intervals requires more equity than is required in a margin.
The fund trades as of U.S.-based companies and governments.