Financial Markets

1. Options versus Futures Describe the general differences between a call option and a futures contract.

2. Speculating with Call Options How are call options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a call option?

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3. Speculating with Put Options How are put options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a

put option?

4. Selling Options Under what conditions would speculators sell a call option? What is the risk to speculators who sell put options?

5. Factors Affecting Call Option Premiums Identify the factors affecting the premium paid on a

call option. Describe how each factor affects the size of the premium.

7. Leverage of Options How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have

8. Hedging with Put Options Why would a financial institution holding the stock of Hinton Co. consider buying a put option on that stock rather than simply selling it?

10. Put Options on Futures Describe a put option on interest rate futures. How does it differ from selling

a futures contract?

11. Hedging Interest Rate Risk Assume a savings institution has a large amount of fixed-rate mortgages

and obtains most of its funds from short-term deposits. How could it use options on financial futures to hedge its exposure to interest rate movements?

Would futures or options on futures be more appropriate if the institution is concerned that interest rates will decline, causing a large number of mortgage prepayments?

13. Change in Stock Option Premiums Explain how and why the option premiums may change inresponse to a surprise announcement that the Fed will increase interest rates, even if stock prices are not affected.

16. Backdating Stock Options Explain what backdating stock options entails. Is backdating consistent with rewarding executives who help to maximize shareholder wealth?