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1、 CHAPTER 21AN INTRODUCTION TO DERIVATIVE MARKETS AND SECURITIESAnswers to Questions1. Since call values are positively related to stock prices while put values are negatively related, any action that causes a decline in stock price (e.g., a dividend) will have a differential impact on calls and puts
2、. Specifically, an impending dividend will boost put values and depress call values.Another way to consider the situation is to represent the difference between the theoretical price of a call option (C) and the theoretical price of a put option (P) as CP. This is the same as a portfolio that is lon
3、g a call option and short a put option. For a firm that pays dividends, we expect that the price of its stock will decline by the amount of the dividend on the last day before the stock goes exdividend. A decline in stock price makes a call less valuable and a put more valuable, so CP will decrease.
4、This portfolio has the same payoff as being long a forward contract with a contract price equal to the strike price. Since there is no guarantee that the strike price is the forward price, this forward contract will typically have a nonzero value (i.e. the call and put will have different prices). A
5、 dividend will decrease the upfront premium for a long position in a forward contract because the expected stock price at expiration decreases. Consequently, CP is decreased by dividends.2. It is generally true that futures contracts are traded on exchanges whereas forward contracts are done directl
6、y with a financial institution. Consequently, there is a liquid market for most exchange traded futures whereas there is no guarantee of closing out a forward position quickly or cheaply. The liquidity of futures comes at a price, though. Because the futures contracts are exchange traded, they are s
7、tandardized with set delivery dates and contract sizes.If having a delivery date or contract size that is not easily accommodated by exchange traded contracts is important to a future/forward end user then the forward may be more appealing. If liquidity is an important factor then the user may prefe
8、r the futures contract.Another consideration is the marktomarket property of futures. If a firm is hedging an exposure that is not markedtomarket, it may prefer to not have any intervening cash flows, hence it will prefer forwards.3. For forwards, calls and puts, what the long position gains, the sh
9、ort position loses, and vice versa. However, while payoffs to forward positions are symmetric, payoffs to call and put positions are asymmetric. That is to say, long and short forwards can gain as much as they can lose, whereas long calls and puts have a gain potential dramatically greater than thei
10、r loss potential. Conversely, short calls and puts have gains limited to the option premium but have unlimited liability.For example, if the price of wheat declines by 10%, the losses to a long position in a futures contract on wheat would be the same as the gains if the price were to increase by 10
11、%. For an atthemoney call option, there would be an asymmetric change in value. A long position in an atthemoney call option on wheat would decline in value less for a 10% fall in wheat prices than it would increase from a 10% rise in wheat prices.Position Loss Potential Gain Potential SymmetryLong
12、Forward Kunlimited symmetricShort Forward unlimited K symmetricLong Call Call premiumunlimited asymmetricShort Call unlimited Call premium asymmetricLong Put Put premium K asymmetricShort Put K Put Premium asymmetric4. CFA Examination III (1993)4(a). Derivatives can be used in an attempt to bridge t
13、he 90day time gap in the following three ways:(1) The foundation could buy (long) calls on an equity index such as the S&P 500 Index and on Treasury bonds, notes, or bills. This strategy would require the foundation to make an immediate cash outlay for the “premiums” on the calls. If the foundation
14、were to buy calls on the entire $45 million, the cost of these calls could be substantial, particularly if their strike prices were close to current stock and bond prices (i.e., the calls were close to being “in the money”).(2) The foundation could write or sell (short) puts on an equity index and o
15、n Treasury bonds, notes, or bills. By writing puts, the foundation would receive an immediate cash inflow equal to the “premiums” on the puts (less brokerage commissions). If stock and bond prices rise as the committee expects, the puts would expire worthless, and the foundation would keep the premiums, thus hedging part or all of the market increase. If the prices fall, however, the foundation loses the difference between the st
