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2. Basis Suppose that Delta Air Lines Inc will buy 60.000 lb oil in December 2006 and now the company buys a February 2007 oil futures (contract size 60,000 lb) to hedge. Now the oil futures price is 84.90 cents/lb. Suppose that Marathon Oil Corp will sell 60,000 lb oil in December 2006 and now the company sells a February 2007 oil futures (contract size 60,000 lb) to hedge. Now the oil futures price is 84.90 cents/lb. A. (6 points) What is the effective price paid by the Delta Air Lines Inc for the oil? (use notation for the answer, if needed) B. (6 points) Will Delta Air Lines Inc benefit for a smaller basis in December 2006? C. (6 points) What is the effective price received by the Marathon Oil Corp for the oil? (use notation for the answer, if needed) D. (6 points) Will Marathon Oil Corp benefit for a smaller basis in December 2006? 1. Elementary Option Trading Strategies (Covered call writing and Floors) Suppose an investor owns 100,000 shares of IBM stock at $120 per share. If the investor expects no large price rise and possible drop in price, he or she) sells 100,000 December 125 call option at $7, receiving $700,000. a. (5 points) If IBM stock drops only slightly from $120 to $113, what is the profit associated with the covered call writing strategy? b. (5 points) If IBM stock rises only slightly from $120 to $125, what is the profit associated with the covered call writing strategy? c. (5 points) Find the stock price level such that the profit of covered call writing equals the profit of owning only IBM stock. Suppose an investor owns 100,000 shares of IBM stock at $120 per share. The investor does not want to miss the chance of IBM stock price increase, but is afraid of a sharp downturn. He (or she) buys 100,000 December 110 put option at $3, paying $300,000. d. (5 points) If IBM stock rises from $120 to $150, what is the profit associated with the protective put buying strategy? e. (5 points) If IBM stock decreases from $120 to $80, what is the profit associated with the protective put buying strategy? (5 points) Find the stock price level such that the profit of protective put buying strategy equals the profit of owning only IBM stock. 2. Basis Suppose that Delta Air Lines Inc will buy 60.000 lb oil in December 2006 and now the company buys a February 2007 oil futures (contract size 60,000 lb) to hedge. Now the oil futures price is 84.90 cents/lb. Suppose that Marathon Oil Corp will sell 60,000 lb oil in December 2006 and now the company sells a February 2007 oil futures (contract size 60,000 lb) to hedge. Now the oil futures price is 84.90 cents/lb. A. (6 points) What is the effective price paid by the Delta Air Lines Inc for the oil? (use notation for the answer, if needed) B. (6 points) Will Delta Air Lines Inc benefit for a smaller basis in December 2006? C. (6 points) What is the effective price received by the Marathon Oil Corp for the oil? (use notation for the answer, if needed) D. (6 points) Will Marathon Oil Corp benefit for a smaller basis in December 2006? 1. Elementary Option Trading Strategies (Covered call writing and Floors) Suppose an investor owns 100,000 shares of IBM stock at $120 per share. If the investor expects no large price rise and possible drop in price, he or she) sells 100,000 December 125 call option at $7, receiving $700,000. a. (5 points) If IBM stock drops only slightly from $120 to $113, what is the profit associated with the covered call writing strategy? b. (5 points) If IBM stock rises only slightly from $120 to $125, what is the profit associated with the covered call writing strategy? c. (5 points) Find the stock price level such that the profit of covered call writing equals the profit of owning only IBM stock. Suppose an investor owns 100,000 shares of IBM stock at $120 per share. The investor does not want to miss the chance of IBM stock price increase, but is afraid of a sharp downturn. He (or she) buys 100,000 December 110 put option at $3, paying $300,000. d. (5 points) If IBM stock rises from $120 to $150, what is the profit associated with the protective put buying strategy? e. (5 points) If IBM stock decreases from $120 to $80, what is the profit associated with the protective put buying strategy? (5 points) Find the stock price level such that the profit of protective put buying strategy equals the profit of owning only IBM stock

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