CORPORATE FINANCE II TUTORIALS

QUESTIONS FOR TUTORIALS

TOPIC: DERIVATIVES

Question 1

Define the following::

 derivative
 forward contract
 futures contract
 option
 call option
 put option
 long position
 short position
 puttable bond
 callable bond
 writer
 holder
 premium
 strike price
 spot price
 exercise price
 in-the-money
 at-the-money
 out-of-the-money
 over-the-counter market
 margin account
 initial margin
 margin call
 underlying asset

Question 2

Draw the payoff diagrams for the following derivative positions:

i. long forward
ii. short forward
iii. long futures
iv. short futures
v. long call
vi. short call
vii. long put
viii. short put

Question 3

A Call Option on Whitney Jackson Pharmaceuticals with an exercise price of $115.00

per share, and expiring on 7 May 2012, sales on 28 February 2012 for $7.
If on 7 April 2012 the Whitney Jackson Pharmaceuticals stock is trading / selling at
$112.00:
a) Calculate the pay-off to the call holder on 7 April 2012
b) Will the holder exercise the option on the 7 April 2012?
c) Calculate the pay-off on the expiration date if the Whitney Jackson Pharmaceuticals
Stock trades at $102

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CORPORATE FINANCE II TUTORIALS
QUESTIONS FOR TUTORIALS

TOPIC: DERIVATIVES

Question 4

A Put Option on Hardon Properties with an exercise price of $115.00 per share, and
expiring on 7 May 2012, sales on 28 February 2012 for $5.
If on 7 April 2012 the Hardon Properties stock is trading / selling at $112.00:
(a) Calculate the payoff to the put holder.
(b) Will the holder exercise the option on 7 April 2012?
(c) Calculate the pay off on the expiration date if the Hardon Properties Stock trades
at $106

Question 5

Consider a futures contract in which the current price is US$212, the initial margin
requirement is US$10 and maintenance margin is US$8. You go long 20 contracts
and meet all margin calls but do not withdraw any excess margin.

Required
Complete the table below. Assume that the contract is purchased at the settlement
price of that day so that there is no mark to market profit or loss at the day of
purchase. Also determine profit or loss at the end of day 6.

Day Beginning Funds Futures Price Gross Ending

Balance/Margin deposited Price Change Change Balance/
Margin

0 212
1 211
2 214
3 209
4 210
5 204
6 202
Profit/Loss