Major functions of derivative markets in the economy

Problem 1. What are the major functions of derivative markets in the economy? What are some ways in which derivatives can be misused?

Problem 2. Explain the difference between an American option and a European option. What do they have in common?

Questions 3-5 use the information found in the following table from the CBOE for options on Google's stock selling at the time for $315 per share.

Calls    Last Sale    Net    Bid    Ask    Vol    Open Int    Puts    Last Sale    Net    Bid    Ask    Vol    Open Int
09 Jan 310.00 (GGD AB-E)    10.80    -8.00    10.50    11.00    147    2097    09 Jan 310.00 (GGD MB-E)    5.30    +0.90    5.50    5.80    1042    3860
09 Jan 320.00 (GGD AD-E)    5.80    -6.10    5.30    5.70    774    4003    09 Jan 320.00 (GGD MD-E)    10.50    +3.20    10.20    10.70    561    4355
09 Feb 310.00 (GGD BB-E)    26.50    -6.00    25.60    26.10    32    540    09 Feb 310.00 (GGD NB-E)    20.00    +2.15    20.40    20.90    28    911
09 Feb 320.00 (GGD BD-E)    21.35    -5.05    20.30    20.80    133    827    09 Feb 320.00 (GGD ND-E)    24.30    +2.30    25.10    25.70    79    524

Problem 3. Which contracts in the table are currently in-the-money? Which are out-of-the-money?

Problem 4. For which contract(s) is the bid-ask spread lowest? Why do you think this is so?

Problem 5. Suppose an investor buys the Feb 320 call contract on January 1 and holds to expiration when the stock is selling for exactly $360. What is the annualized return on investment for this option position if the contract is until expiration?

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Finance Basics: Major functions of derivative markets in the economy
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