Problem: You are a portfolio manager and you are of the opinion that Deeg Inc. shares will rise from its current levels of R200. You are seriously considering purchasing some of these shares. You currently have R400 000 to invest. You are also considering buying call options on Deeg shares instead of the shares itself. These options expire in three months time and have an exercise price of R210. The call options are currently selling at R40 each.
Q1. How shares can you buy?
Q2. How many options can you buy?
Q3. Calculate the three month rate of return on both strategies assuming that at the option expiration date the Deeg share price has (1) increased to R265 or (2) decreased to R185.
Q4. At what share price level will the person who sells you the Deeg call option break even? Calculate the maximum loss that the call option seller may suffer, assuming that he does not already own Deeg stock.
Q5. Discuss the fundamental distinction between a futures contract and an option on a futures contract.
Q6. Explain why you agree/disagree with the following statement. 'If two bonds have the same duration, then the percentage change in the price of the two bonds will be the same for a given change in interest rates.'