114 Review Questions

Chapter 12 Review Questions

1. What is the difference between someone using a derivative security to hedge risk and someone using a derivative security to speculate?

 

2. Explain how vertical integration may be used as a method of hedging against commodity price risk.

 

3. What is the difference between a forward contract and a futures contract?

 

4. You are considering purchasing a call option to purchase Mexican pesos in three months with a strike price of MXN 20/USD. The premium for this call option is MXN 2. Show the payoff you will receive at various prices in a diagram.

 

5. You are considering writing a call option to purchase Mexican pesos in three months with a strike price of MXN 20/USD. The premium for this call option is MXN 2. Show the payoff you will receive at various prices in a diagram.

 

6. Why are options considered to be a “zero-sum game”?

 

Attribution:

This chapter is from “Principles of Finance”  https://openstax.org/books/principles-finance/pages/1-why-it-matters by Dahlquist and Knight. This book is licensed under the CC-BY 4.0 license. 2022 OpenStax.

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PPSC FIN 2010 Principles of Finance by Cristal Brietbeil and Eric Schroeder is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License, except where otherwise noted.

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