Imagine a corn farmer today, who is concerned about corn prices going down significantly, by the time she brings her annual corn crop to the market in December. Devise a solution for her in the derivatives market to ensure a viable price for her crop in December. Which derivatives contract should she use? Should she take a long or short position? ]
2. Name and describe the major types of financial securities (asset classes) that are available for investing in the financial markets. Name (and briefly describe) at least three.
3. Suppose you predict a financial security to decline in value in the near future. Name the particular trading strategy you can employ to take advantage of your prediction. Also name another investment strategy using options that would do well and generate profits under this scenario.
4. Recall our discussion of municipal bonds (munis) as a major segment of the U.S. bond market. Answer the following questions:
a. What are the two distinct types of munis?
b. Foreign investors have a substantial presence in the U.S. bond markets as buyers of all kinds of bonds issued by U.S. borrowers. The only exception seems to be the muni bond market. Foreign investors have no interest whatsoever in munis. Why might that be?
5. SPY January 2018 call options with an exercise price of $240 were selling at $2.23 at the end of January 2017. Today they are selling at $6.30. The underlying SPY stock (ETF) price was $237.91 at the end of January 2017. Today it is selling at $243.31. Compute the holding period returns for each investment (call option and ETF) from end of January to today. (Note: SPY did not pay any dividends since January. Also assume that the options were not to be exercised, just bought and sold).
6. Suppose that you purchased on margin 100 shares of Lindsay Corp. (LNN) currently selling at $100/share. Your initial margin is 60% and the maintenance margin is 25%. What is the margin-triggering stock price? (Assume no dividends, interest, or transaction costs.)
7. Assume that you have just purchased some shares in an investment company reporting $600 million in assets, $40 million in liabilities, and 35 million shares outstanding. What is the net asset value (NAV) of these shares?
8. Open-end equity mutual funds find it necessary to keep a significant percentage of total investments, typically around 5% of the portfolio, in very liquid cash-like assets. Closed-end funds do not have to maintain such a position in “cash-equivalent” securities. What difference between open-end and closed-end funds might account for their differing policies?
9. Terra Fund started the year with a net asset value of $13.50. By year-end, its NAV equaled $12.07. The fund paid year-end distributions of income and capital gains of $1.30. What was the rate of return to an investor in the fund?
10. You’ve borrowed $20,000 to buy shares in DDD on margin, which is now selling at $36 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $32 per share.
a. Will you receive a margin call? Yes, no, why?
b. How low can the price of DDD shares fall before you receive a margin call?