Question

1. Why are Treasury bills called “discount” securities? Briefly explain.

2. What are the major difference between money market securities and capital market securities? Briefly describe.

3. When the stock market goes into a panic mode, investors run to Treasury market. Why? Justify the phenomena called “flight to quality.” Look up chapter 3 and google it.

4. Read the article about Mark Cuban Jr. from my class web site under chapter 3. Describe what option strategy he used to hedge exposure of Yahoo stocks. How did he profit with the strategy? Under what circumstance would you employ such option strategy as Cuban did? Briefly explain.

5. You sell (go short) 10 gold futures contracts at $400 per ounce, where the contract size is 100 ounces. At contract maturity, gold is selling for $410 per ounce. What is your profit (+) or loss (−) on the transaction?

6. You buy 100 CJC put option contracts with a strike price of 92 at a quoted price of $8. At option expiration, CJC sells for $83.80. What is your net profit on the transaction?

7. You purchase 10 call option contracts with a strike price of $75 and a premium of $3.85. If the stock price at expiration is $82, what is your dollar profit? What if the stock price is $72?

8. You want to find the option prices for ConAgra Foods (CAG). Go to finance.yahoo.com, get a stock quote, and follow the “Options” link. What are the option premium and strike price for the highest and lowest strike price options that are nearest to expiring? What are the option premium and strike price for the highest and lowest strike price options expiring next month?

9. Go to www.cmegroup.com and find the contract specifications for corn futures. What is the size of the corn futures contract? On the Web site, find the settle price for the corn futures contract that will expire the soonest. If you go long 10 contracts, how much will the corn cost at the current price?

Answer 1

1.Treasury bills are known as discount instruments as rather than making interest payments, they are issued at a discount to face value and mature at face value.The appreciation between issuance price and maturity price provides the investment return.

2.

BASIS FOR COMPARISON	MONEY MARKET Securities	CAPITAL MARKET Securities
Meaning	A segment of financial market where short term securities are traded is called money market.Hence money market securities are short term securities.	A segment of financial market where Long term securities are traded is called capital market.Hence Capital market securities are Long term securities.
Examples	Treasury Bills, Commercial Papers, Certificate of Deposit, Trade Credit etc.	Shares, Debentures, Bonds, Retained Earnings, Asset Securitization, Euro Issues etc.
Liquidity	High	Low
Time Horizon	Within a year	More than a year
Return on Investment	Return on Investment	Comparatively High

3.The strategy Cuban used is known as a costless collar. A collar consists of two legs: buying a downside put and selling an upside call. A costless collar has the premium of the put offsetting the call's exactly so that there is no cost to enter the collar trade.

The Nuts and Bolts of Cuban’s Trade

• Cuban owned 14,60,000 shares of !Yahoo at a value of $95 per share.
• Cuban bought 146,000 put options with a $85 strike.
• Cuban sold 146,000 call options with a $205 strike.

The premium paid for the put options was equal to the premium he received for the call options which meant he paid $0 (except the fat commissions the investment bankers earned).

So at the time of the trade Cuban’s net worth was $1.4 billion. If Yahoo! tanked, Cuban was guaranteed he could sell all of his stock at $85 per share and receive $1.2 billion. If Yahoo! took off and went up past $205, Cuban was going to be forced to sell his shares for a total of $3.0 billion.

Collar Trading Strategies have a widespread usage. Conservative Investors find it to be a good trade-off to limit profits in return for limited losses and Portfolio managers use it to protect their position in the market, while some investors practise it as it reduces the price of the protective put.

4.Loss on future transaction(You sell (go short) 10 gold futures contracts at $400 per ounce, where the contract size is 100 ounces. At contract maturity, gold is selling for $410 per ounce )

=(Maturity Value - exercise price) * no of lot * lot size

.= (410-400)*10*100= $10000

5. Gain on Put transaction(You buy 100 CJC put option contracts with a strike price of 92 at a quoted price of $8. At option expiration, CJC sells for $83.80)

=[(Spot price - Exercise Price)- Premium] * No of option

= [(92-83.80)- 8] * 100= $20

6. Gain on Call transaction(You purchase 10 call option contracts with a strike price of $75 and a premium of $3.85 , the stock price at expiration is $82 )

=[(stock price at expiration - strike price) - Premium] * No of option

= [(82-75)-3.85] * 10 = $ 31.5

Loss on call transaction(You purchase 10 call option contracts with a strike price of $75 and a premium of $3.85 , the stock price at expiration is $72 )

Call lapses as the stock price at expiration is less than strike price, hence the entire amount of premium paid will be the loss

= 3.85 * 10 = $38.5

7.

option premium and strike price for the highest and lowest strike price options that are nearest to expiring as well as expiring next month
	Calls for March 15, 2019		Premium
		Strike price	Bid	Ask
		17	7	7.3
		19	5	5.3
	Puts for March 15, 2019		Premium
		Strike price	Bid	Ask
		15	0	0.05
		45	20.8	21

8. size of the corn futures contract =5,000 bushels (~ 127 Metric Tons)

settle price for the corn futures contract that will expire the soonest(March 2019)= 370.00

If i go long 10 contracts, how much will the corn cost at the current price = 370.00*10= 3700