Practice Questions (Answers in Solutions Manual)

  1. 1.1. What is the difference between a long forward position and a short forward position?

  2. 1.2. Explain carefully the difference between hedging, speculation, and arbitrage.

  3. 1.3. What is the difference between entering into a long forward contract when the forward price is $50 and taking a long position in a call option with a strike price of $50?

  4. 1.4. Explain carefully the difference between selling a call option and buying a put option.

  5. 1.5. An investor enters into a short forward contract to sell 100,000 British pounds for U.S. dollars at an exchange rate of 1.5000 USD per pound. How much does the investor gain or lose if the exchange rate at the end of the contract is (a) 1.4900 and (b) 1.5200? ...

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