Question

 

a- Preferred stock with a face value of $100 has a stated dividend of 2.5%. Indicate the amount of preferred dividends that the company must pay each year.

b- Non-cumulative preferred stock with a face value of $100 million has a stated dividend of 3.1%. Dividends were not paid last year. The company intends to pay dividends of $8 million this year. Calculate the amount of the common dividend.

c- Cumulative preferred stock with a face value of $100 million has a stated dividend of 3.1%. Dividends were not paid last year. The company intends to pay dividends of $8 million this year. Calculate the amount of the common dividend.

d- You believe that soybeans will decrease in price. As a speculator, indicate if you would buy or sell a futures contract.

e- You believe that light sweet crude oil will increase in price. As a speculator, indicate if you would buy or sell a put option or a call option.

f- You are a seller of soybeans and are concerned that it might decrease in price. To protect yourself, indicate if you would you buy a put option or a call option

g- You buy a soybean meal futures contract for 5,000 bushels at $10.21/bushel. Calculate the gain or (loss) if the price increases to $10.27.

h- You buy a call option for 1,000 barrels of light sweet crude oil at $40/barrel. The cost of the option is $0.04/barrel. Calculate the total net gain or (loss) if the price increases to $42/barrel.

i- You buy a put option for 5,000 bushels of soybeans at $10.15/bushel. The cost of the option is $0.53/bushel. Calculate the total net gain or (loss) if the price decreases to $10.10/bushel

j- You sell a put option for 5,000 bushels of soybeans at $10.15/bushel. The cost of the option is $0.53/bushel. Calculate the total net gain or (loss) if the price increases to $10.20/bushel

Answer 1

a- Preferred stock with a face value of $100 has a stated dividend of 2.5%. Indicate the amount of preferred dividends that the company must pay each year.

Answer-

Amount of preferred dividends that the company must pay each year= Face value* Rate of dividend = $100*2.5%= $2.5

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b- Non-cumulative preferred stock with a face value of $100 million has a stated dividend of 3.1%. Dividends were not paid last year. The company intends to pay dividends of $8 million this year. Calculate the amount of the common dividend.

Answer-

Non cumulative Preferred stock means , if preferred dividend is not paid in any year, then the dividend will not accumulate in arrear.

	Total Dividends to be paid	$8000000
Less-	Preferred Dividend
	last year preferred dividend	0
	Current year preferred dividend	$3100000
	[$100 Million*3.1%]
	Amount of common dividend	$4900000

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c- Cumulative preferred stock with a face value of $100 million has a stated dividend of 3.1%. Dividends were not paid last year. The company intends to pay dividends of $8 million this year. Calculate the amount of the common dividend.

Answer-

Cumulative Preferred stock means , if preferred dividend is not paid in any year, then the dividend will keep accumulate in arrear and Should be paid in later years.

	Total Dividends to be paid	8000000
Less-	Preferred Dividend
	last year preferred dividend	3100000
	[$100 Million*3.1%]
	Current year preferred dividend	3100000
	[$100 Million*3.1%]
	Amount of common dividend	$1800000

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d- You believe that soybeans will decrease in price. As a speculator, indicate if you would buy or sell a futures contract.

Ans-

If  soybeans will decrease in price in , then You should sell futures Contract to earn gain/profit.

Because seller will gain incase of decrease in price

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e.You believe that light sweet crude oil will increase in price. As a speculator, indicate if you would buy or sell a put option or a call option.

Ans-

If You believe that light sweet crude oil will increase in price, then you should Buy a call option.

Because Buying call option will give you right to buy the asset at maturity at a fixed price. If price will rise at maturity then you can sell the Cruid oil at higher price and earn arbitrage profit at maturity.

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f-You are a seller of soybeans and are concerned that it might decrease in price. To protect yourself, indicate if you would you buy a put option or a call option.

Ans- You should buy a put option.

Because buying a put option will give you right to sell Soybeans at a fixed price at future dates. This will protect you from decrease in price.

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g- You buy a soybean meal futures contract for 5,000 bushels at $10.21/bushel. Calculate the gain or (loss) if the price increases to $10.27.

Answer-

-Increase in price will cause gain for the Futures buyer.

-Hence gain = ($10.27-$10.21) per Bushel* 5000 bushel = $300 gain

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h- You buy a call option for 1,000 barrels of light sweet crude oil at $40/barrel. The cost of the option is $0.04/barrel. Calculate the total net gain or (loss) if the price increases to $42/barrel.

Answer-

Option premium paid(A)	40
[$0.04Per barrel *1000 barrel]
Gain Due to increase in price(B)	2000
[($42-$40)*1000]
Net gain(B-A)	$1960
[gain - premium paid]

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i- You buy a put option for 5,000 bushels of soybeans at $10.15/bushel. The cost of the option is $0.53/bushel. Calculate the total net gain or (loss) if the price decreases to $10.10/bushel

Answer-

Option premium paid(A)	2650
[$0.53Per bushel *5000 ushel]
Gain on put option Due to decrease in price(B)	250
[($10.15-$10.10)*5000]
Net gain/(Loss)(B-A)	-$2400 (loss)
[gain - premium paid]

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j- You sell a put option for 5,000 bushels of soybeans at $10.15/bushel. The cost of the option is $0.53/bushel. Calculate the total net gain or (loss) if the price increases to $10.20/bushel.

Answer-

here the buyer of the put option will not exercise exercise his option to sell the soybeans to you. Because buyer of the put option has right to sell the soybeans to you @$10.15/bushel..

Instead of selling it to you@ $10.15/bushel., the buyer of the put option can sell it in market @$10.20/bushel.

hence your gain is the option premium received by you due to selling the put option.

Gain = 5,000 bushels*$0.53/bushel.=$2650