Question

On 1 January you sold one March maturity S&P/ASX 200 index futures contract at a futures price of 700. If the futures price is 800 on 1 February, what is your profit? The contract multiplier is $25. In other words, the contract calls for delivery of $25 times the value of index. 1 index point move translates into a $25 change in the value of the contract. a. $100 b. -$100 c. $700 d. $2,500 e. -$2,500

Which one of the following statements about the value of a call option at expiration is FALSE? a. A short position in a call option may result in a loss if the stock price exceeds the exercise price. b. The value of a long position equals zero or the stock price minus the exercise price, whichever is higher. c. The value of a long position equals zero or the exercise price minus the stock price, whichever is higher. d. A short position in a call has a zero value for all stock prices equal to or less than the exercise price. e. The maximum possible value of a long position is positively unlimited.

Suppose investors believe that the standard deviation of the market portfolio will decrease by 50% and the market risk premium remains the same. What does the CAPM imply about the effect of this change on the Commonwealth Bank of Australia (CBA)? I. CBA’s required rate of return will increase. II. CBA’s required rate of return will decrease. III. CBA’s risk premium will increase. IV. CBA’s risk premium will decrease. a. I only b. II only c. I and III only d. I and IV only e. II and IV only

Answer 1

frist part

profit on selling future = (selling price - future price)* contract multiplier

-$2500= (700-800)*25

therefore its a loss of $2500 on selling the future contract

second part

statement C is false as in long term call losses are limited to call premium thus the stock price is always higher or equal to exercise price so it would be 0 or stock price - exercise price

third part

option e is correct as the risk factor, beta or standard deviation falls by 50%, the risk premium will also be reduced by 50% and therefore the overall expected return will also fall by 50%, risk free return being unchanged

expected return = risk free return + (S.D. * RISK PREMIUM)