Question

Answer the following questions:

1. Explain why some futures contracts are settled in cash while others are not. Provide an example of each.
2. You are a wheat farmer with a crop that will be ready to harvest in approximately three months. How can you hedge this crop and what are the advantages and disadvantages of doing so?
3. You are the chief financial officer (CFO) of a major textile importer. Identify one of the key risks your company faces and explain how you can hedge this risk using futures.
4. You wrote a put with a strike price of $20 and a premium of $1. Draw a graph depicting your profits or losses for stock prices ranging from $0 to $40. Be sure to completely label your graph.
5. SLK stock is selling for $28 a share. A $30 call on this stock is priced at $2. What is your maximum profit and maximum loss if you buy the stock and write the call? How does this compare to your maximum profit and loss if you write the call but do not purchase the stock?
6. Explain how options can be used to manage risk. Provide an example using a call option and another example using a put option.

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1. Explain why some futures contracts are settled in cash while others are not. Provide an example of each.
Traditionally, standardized futures contracts call for delivery of an actual commodity such as corn, if the contract is not reversed before maturity. However, some of the newer financial futures contracts are settled in cash because it would not be practical to deliver every stock in the index....

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