1 Adam, a speculator, is convinced that the stock market will fall significantly in the forthcoming.

1 Adam, a
speculator, is convinced that the stock market will fall significantly in the forthcoming
months. The current market index (14 August) level is 4997 (FTSE 100). He is
investigating a strategy to exploit this market fall: Sell five FTSE 100 Index
futures on NYSE Liffe with a December expiry, current price 5086. Extracts
from the Financial
Times

FTSE 100 Index Futures (LIFFE) 10 per
full index point

Assume: No transaction
costs.

i What would

1 Adam, a
speculator, is convinced that the stock market will fall significantly in the forthcoming
months. The current market index (14 August) level is 4997 (FTSE 100). He is
investigating a strategy to exploit this market fall: Sell five FTSE 100 Index
futures on NYSE Liffe with a December expiry, current price 5086. Extracts
from the Financial
Times

FTSE 100 Index Futures (LIFFE) 10 per
full index point

Assume: No transaction
costs.

i What would the profit (loss) be if the index rose
to 5500 in December under the strategy?

ii What would the profit (loss) be if the index fell
to 4500 in December under the strategy?

iii Discuss the relative merits of using traded
options rather than futures for speculation.

Q228;

1 On
14 August British Biotech traded options were quoted on NYSE Liffe as follows:

Assume: No transaction
costs.

a Imagine you write a December 180 put on 14 August.
Draw a graph showing your profit and loss at share prices

ranging from 100p to 250p.

b Add to the graph the profit or loss on the purchase
of 1,000 shares in British Biotech held until late December at share prices
between 100p and 250p.

c Show the profit or loss of the combination of a and
b on the graph.

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