Page 246 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 8: Derivatives

8. An investor who writes a call option against stock held in his portfolio is said to be selling Notes
................
9. A ................ position in futures, can be closed out by selling futures.

10. Purchasing long an interest rate futures contract protects against a ................ in interest
rates.
11. Options are popular because they allow the buyer profits from ................ movements in
exchange rate.
12. An option contract gives the holder of the contracts the option to ................ shares at a
specified price on or before a specific date in the future.
13. The seller of the contract makes a profit when the contract price is ................ the spot price.
14. With a ................ position, a loss ensues if the asset price rises but profits are generated if
the asset price falls.
15. ................ is the result of a negative basis where nearer maturing contracts has higher
futures prices than far-off maturing contract.

8.9 Review Questions

1. Do you think that the stock market will receive a boost with trading in derivatives in
individual securities? State your view with reasons.
2. List out the simple strategies played in the futures market.

3. How are prices determined under futures contracts?
4. Evaluate the growth of the derivatives market in India.
5. How do Currency Futures relate to Spot Rates and Forward Exchange Rates?

6. Have you ever heard about open outcry? Does it exist in India? Why/why not?
7. $32,000 on the preferred dividends in arrears 2 years
$16,000 on the preferred dividends in arrears in the current year
Preferred stock = 200,000 shares of 8% cumulative and participating, $10 par value
Common stock = 800,000 shares of $10 par value.

The Company wants to issue $80,000 to the preferred stock holders, with a 15% participation.
How much is the Company going to pay the common stockholders? How much is the
total dividend payout?
8. If current stock price is 41 annual risk free rate is 6 and 1 year call option with a strike price
of 55 sells for 7.20 what is the value of a put option?
9. Dow Jones futures are very popular these days. What are they? What drives the Dow Jones
futures?

10. How do you calculate gain and loss on covered call options? What are its benefits?
11. In your opinion, what is riskier a call or a put option, and why?
12. In your opinion, how is zero sum maintained in futures trading when speculators
outnumber hedgers?
13. It is said that trading in Futures and Options is very risky. Why so?

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