Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Kenneth R. Szulczyk

forward transaction
derivative
derivative market
derivative security
hedging
speculation
futures
forward contract
long position
short position
margin account
options contract

put option

exercise price

strike price

expiration date

American option

European option

option premium

straddle

Volatility Index (VIX)

Credit Default Swaps (CDS)

currency swap

Chapter Questions

1. Distinguish between spot and forward transactions.


2. Where do derivatives get their value?


3. Distinguish between hedging and speculation.


4. Distinguish between long and short positions.


5. Define a margin account.


6. A company buys 10 contracts for petroleum that specifies a price of $75 per barrel. Each
   contract specifies 1,000 barrels. Who pays and how much into the margin account if the
   price of petroleum shoots up to $150 per barrel?


7. An investor buys a currency futures contract for $1 = 1.5 euros from a bank for 150,000
   euros. Who pays and how much into a margin account if the exchange rate changes to $1 = 1
   euro?


8. Distinguish between a futures and options contract.


9. Distinguish between a call option and a put option.


10. Which factors determine the value of an option’s premium?


11. You are holding 10 call options for petroleum with a strike price of $75 per barrel. Option
    premium equals $0.5 per barrel, and each contract specified a quantity of 1,000 barrels.
    Compute the premium, and whether you will exercise this option if the market price is $50
    per barrel?