Chapter 23

Problems 1-8
Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green
NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-in" be installed in Excel. To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak" and "Solver Add-In."

sis ToolPak"

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Question 1 Input Area:

Initial cocoa price Tons per contract Final cocoa price

$ $

3,122 10 3,081

Output Area:

Initial contract value Final contract value Gain/(Loss)

$ $ $

31,220 30,810 (410)

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Question 2 Input Area:

Initial price per ounce Ounces per contract Number of contracts sold Ending price per ounce Ending price per ounce

$ $

16.6070 5,000 5 16.81 16.32

Output Area:

Initial contract value Final contract value $ 16.81 Gain/(Loss) per contract Gain/(Loss) on short position Final contract value $ 16.32 Gain/(Loss) per contract Gain/(Loss) on short position

$ $ $ $ $ $ $

83,035.00 84,050.00 (1,015.00) (5,075.00) 81,600.00 1,435.00 7,175.00

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Question 3 Input Area:

Strike price Initial price per pound Futures price at expiration Futures price at expiration Pounds per contract

$ $ $ $

1.40 0.0835 1.29 1.67 15,000

Output Area:

Cost per contract

1,252.50 1.29 (1,252.50) 1.67 2,797.50

Final contract value: $ The option is out of the money. Gain/(Loss) per contract $ Final contract value: $ The option is in the money. Gain/(Loss) per contract $

Chapter 23
Question 4 Input Area:

Exercise price per barrel # barrels bought Oil prices:

$ $ $ $ $ $

140 50,000 135 137 140 143 145

Output Area:

The call option gives the manager the right to purchase oil futures contracts at a futures pric $140 per barrel. The manager will exercise the option if the price ri $140 Selling put options obligates the manager to buy oil futures co futures price of $140 per barrel. The put holder will exercise the optio falls below $140 The payoffs per barrel are: Oil futures price: $ 135.00 $ 137.00 $ 140.00 Value of call option position: $ $ $ Value of put option position: $ (5.00) $ (3.00) $ Total value: $ (5.00) # $ (3.00) $ The payoff profile is identical to that of a forward contract with a $15 strike $140 price.

ntracts at a futures price of the option if the price rises above ger to buy oil futures contracts at a er will exercise the option if the price $ $ $ $ 143.00 3.00 3.00 $ $ $ $ 145.00 5.00 5.00

strike price.

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Question 5 Input Area:

Strike price Initial price per pound Futures price at expiration Futures price at expiration Pounds per contract

$ $ $ $

1.35 0.1880 1.14 1.47 15,000

Output Area:

Cost per contract

2,820.00 1.14 330.00 1.47 (2,820.00)

Final contract value: $ The option is in the money. Gain/(Loss) per contract $ Final contract value: $ The option is out of the money. Gain/(Loss) per contract $

Chapter 23
Question 6 Input Area:

Bushels bought Bushels per contract Contract price per bushel Ending price per bushel

$ $

105,000 5,000 7.6500 7.4100

Output Area:

You're concerned about a rise in corn prices so you would buy: 21 December corn futures contracts. By doing so, you're effectively locking in a settle price of $ 7.6500 per bushel of corn, or $ 803,250 Final contract value $ 778,050 Gain $ (25,200) While the price of corn your firm needs has become $ (25,200) less expensive since June, your profit from the futures position has netted out this lower cost.

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Question 7 Output Area:

a. XYZ has a comparative advantage relative to ABC in borrowing at fixed interest rates, while ABC has a comparative advantage relative to XYZ in borrowing at flowting interest rates. Since the spread between ABC and XYZ's fixed rate costs is is only 1%, while their differential is 2% in floating rate markets, there is an opportunity for a 3% total gain by entering into a fixed for floating rate swap agreement. b. If the swap dealer must capture 2% of the available gain, there is 1% left for ABC and XYZ. Any division of that gain is feasible; in an actual swap deal, the division would probably be negotiated by the dealer. One possible combination is .5% for ABC and .5% for XYZ:
10.5% ABC LIBOR +1% LIBOR +1% Debt Market Dealer LIBOR +2.5% +2.5% 10% Debt Market 10.0% XYZ

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Question 8 Output Area:

The financial engineer can replicate the payoffs of owning a put option by selling a forward con example, suppose the forward contract has a settle price of $50 The payoffs below show that the position is the same as owning $50 Coal futures price: Value of call option position: Value of forward position: Total value: Value of put position: $ $ $ $ $ 40 10 10 10 $ $ $ $ $ 45 5 5 5

The payoffs for the combined position are exactly the same as those of owning a put. This me between puts, calls, and forwards must be such that the cost of the two strategies will be the s exists. In general, given any two of the instruments, the third can be synthesized.

put option by selling a forward contract and buying a call. For $50 and the exercise price of a call is also the position is the same as owning a put with an exercise price of

$ $ $ $ $

50 -

$ $ $ $ $

55 5 (5) -

$ $ $ $ $

60 10 (10) -

as those of owning a put. This means that, in general, the relationship st of the two strategies will be the same, or an arbitrage opportunity d can be synthesized.