Finance 300 Financial Markets Incomplete SlidesLecture 23Slide 3Lecture 24Slide 5Lecture 26Slide 7Slide 8Slide 9Lecture 27Slide 11Slide 12Slide 13Lecture 28Slide 15Finance 300Financial MarketsIncomplete SlidesIncomplete Slides, Lectures 22-29© Professor J. Petry, Fall 2002http://www.cba.uiuc.edu/broker/fin300/fin300pp.htm2Lecture 23George delivers on his futures contracts:Day 1 deposit to margin account -11,250Day 2 margin call, additional deposit to account -5,000Day 5 voluntary withdrawal of excess margin 2,500Net margin deposits -13,750George delivers 50,000 bushels of soybeans at 631 (futures price) 315,500Withdrawal of margin once futures contract is delivered 13,750Net income from soybean farming 315,500George unwinds his position at 636:Net margin deposits -13,750Withdrawal of remaining equity once net position is zero 11,250sold 10 contracts at 631, bought 10 at 636net difference of 2,500 is loss deducted from equityGeorge delivers 50,000 bushels of soybeans at 636 (spot price) 318,000Net income from soybean farming 315,5003Lecture 23John Q. Investor (bought 10 contracts at 436)Settle Daily profit Cum profit Margin & Equitymargin calls436 [ ] To Date: -8,100 8,100481 [ ] 22,500 22,500 30,600526 [ ] 22,500 45,000 53,100571 [ ] 22,500 67,500 75,600600 [ ] 14,500 82,000 w/d 82,000 8,100Total 82,000 73,9004Lecture 24IX-3 A & B: (Similar question to TTD, different numbers)George Q. Farmer - Hedge Positionhedge is set Sell Nov 98 Futures 10 contracts at 631 (=$315,500) Margin: -11,250Oct 1998 Buy Nov 98 Futureshedge is lifted 10 contracts at 611 (=$305,500) Profit: 10,000Margin: 11,250Sell Soybeans on spot market at 6.00 300,000Net Position: 310,000George Q. Farmer - No Hedge PositionOct 1998 Sell Soybeans on the spot market at 6.00 300,000Net Position: 300,000Tofu, Inc - Hedge Positionhedge is set Buy Nov 98 Futures 10 contracts at 631 (=$315,500) Margin: -11,250Oct 1998 Sell Nov 98 Futureshedge is lifted 10 contracts at 611 (=$305,500) Profit: -10,000Margin: 11,250Buy Soybeans on the spot market at 6.00 -300,000Net Position: -310,000Tofu, Inc - No Hedge PositionOct 1998 Buy Soybeans on the spot market at 6.00 -300,000Net Position: -300,0005Lecture 24IX-3 C: (Similar to TTD, but different numbers)George Q. Farmer - Hedge Positionhedge is set Sell November 98 Futures: 10 contracts at 631 (315,500) Margin: -11,250Oct 1998 Buy November 98 Futures:hedge is lifted 10 contracts at 714 ($357,000) Profit: -41,500Margin: 11,250Sell soybeans on the spot market at $7.00 350,000Net Position: 308,500George Q. Farmer - No Hedge PositionOct 1998 Sell soybeans on the spot market at $7.00 350,000Net Position: 350,000Tofu, Inc - Hedge Positionhedge is set Buy November 98 Futures: 10 contracts at 631 (315,500) Margin: -11,250Oct 1998 Sell November 98 Futures:hedge is lifted 10 contracts at 714 (357,000) Profit: 41,500Margin: 11,250Buy soybeans on the spot market at $7.00 -350,000Net Position: -308,500Tofu, Inc - No Hedge PositionOct 1998 Buy soybeans on the spot market at 7.00 -350,000Net Position: -350,0006Lecture 26Strategy Options Strategies: Equity Strategy:Write IBM Call Options Sell IBM ShortStrike Price:In the Money: At the Money: Out of the Money:$40 $50 $60Initial Investment:1,102.50 256.25 37.5 5,000$30option expires option expires option expires -3,000profit 1,102.50 256.25 37.5 2,000$40option expires option expires option expires -4,000profit 1,012.50 256.25 37.5 1,000$50option expires option expiresexercise 4,000stock value -5,000 5,000profit 12.50 265.25 37.5 0$60option expiresexercise 4,000 5,000stock value -6,000 -6,000 -6,000profit -987.50 -743.75 37.5 -1,000$70exercise 4,000 5,000 6,000stock value -7,000 -7,000 -7,000 -7,000profit -1,987.50 -1,743.75 -962.50 -2,000Rate of return-99% to 51% -87% to 13% -48% to 2% -100% to +100%*option p/l assumes $2,000 margin requirement7Lecture 26Strategy Options Strategies: Equity Strategy:Buy IBM Put Options Sell IBM ShortStrike Price:In the Money: At the Money: Out of the Money:$40 $50 $60Initial Investment:-18.75 -256.25 -1,006.25 5,000$30buy stock -3,000 -3,000 -3,000 -3,000exercise 4,000 5,000 6,000profit 981.25 1,743.75 1,993.75 2,000$40buy stock -4,000 -4,000 -4,000exercise option expires 5,000 6,000profit -18.75 743.75 993.75 1,000$50buy stock -5,000exercise option expires option expires 6,000 5,000profit -18.75 -256.25 -6.25 0$60buy stockexercise option expires option expires option expires -6,000profit -18.75 -256.25 -1,006.25 -1,000$70buy stock exercise option expires option expires option expires -7,000profit -18.75 -256.25 -1006.25 -2,000Rate of return5,133% to -100% 580% to -100% 198% to -100% -80% to +80%*outright p/l assumes $5,000 from sale plus $2,500 in margin requirement8Lecture 26Strategy Options Strategies: Equity Strategy:Write IBM Put Options Buy IBM SharesStrike Price:In the Money: At the Money: Out of the Money:$40 $50 $60Initial Investment:18.75 256.25 1,006.25 -5,000$30exercise -4,000 -5,000 -6,000stock value 3,000 3,000 3,000 3,000profit -981.25 -1,743.75 -1,993.75 -2,000$40exercise -5,000 -6,000stock value option expires 4,000 4,000 4,000profit 18.75 -743.75 -993.75 -1,000$50exercise -6,000stock value option expires option expires 5,000 5,000profit 18.75 256.25 6.25 0$60exercisestock value option expires option expires option expires 6,000profit 18.75 256.25 1,006.25 1,000$70exercise stock value option expires option expires option expires 7,000profit 18.75 256.25 1006.25 2,000Rate of return-49% to 1% 580% to -100% 198% to -100% -80% to +80%*p/l on options assumes $2,000 margin requirement9Lecture 26Strategy Options Strategies: Protective Put Equity Strategy:Buy IBM and Hedge with a Put Option Buy IBM SharesStrike Price:$40 $50 $60Initial Investment:stock purchase -5,000 -5,000 -5,000 -5,000premium -18.75 -256.25 -1,006.25$30exercise 4,000 5,000 6,000stock value 3,000profit -1,018.75 -256.25 -6.25 -2,000$40exercise 5,000 6,000stock value 4,000 4,000profit -1,018.75 -256.25 -6.25 -1,000$50exercise 6,000stock value 5,000 5,000 5,000profit -18.75 -256.25 -6.25 0$60exercisestock value 6,000 6,000 6,000 6,000profit 981.25 743.75 -6.25 1,000$70exercisestock value 7,000 7,000 7,000 7,000profit 1981.25 1,743.75 993.75 2,000Rate of return-20% to 39% -5% to 33% .4% to 17% -40% to +40%*p/l on options assumes $2,000 margin requirement10Lecture 27Strategy Options Strategies: Covered Call Equity Strategy:Buy IBM and Write a Call