HomeWork 5


1. What are the differences between futures and forward markets? What are the pros and cons associated with using each one?


2. What role does the exchange play in futures market transactions?


3. Explain the differences between a put and a call. Draw  a diagram showing the payoffs of puts and calls at expiration. Draw it from the perspective of both the option buyer and seller.


4. Explain the difference in the gain and loss potential of a call option and a long futures position. Under what circumstances do you think someone would prefer the option to the future or vice versa?


5. Futures contracts on stock indexes are very popular. Why do you think that is so? How do you think they might be used?


6. Explain how futures contracts can be used to lock in returns on foreign investment. When is it profitable to do so.?


7. Assume that in March a farmer and a baker enter into a forward contract on 1000 bushels of wheat at a price of $3.00 per bushel for delivery in September. In September the spot price of wheat is $2.50 per bushel. Who has profited from entering into the forward contract and who has lost? How much is the gain and how much is the loss. ?