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MN30507

Financial Markets — Derivatives

Workshop 1

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

2. A trader buys a call option with a strike price of $30 for $3. Does the trader ever exercise the option and lose money on the trade. Explain.

3. Suppose that GBP/USD and forward exchange rates are as follows:

What opportunities are open to an arbitrageur in the following situations?

(a) A 180-day European call option to buy £1 for $1.52 costs 2 cents.

(b) A 90-day European put option to sell £1 for $1.59 costs 2 cents.

4. Construct a table showing the payoff from a bull spread when puts with strike prices K1 and K2 are used (K2 > K1).