8. a. The buyer of a call option pays money for the right to buy
b. The buyer of a put option pays money for the right to sell
c. The seller of a call option receives money for the obligation to sell
d. The seller of a put option receives money for the obligation to buy
a. The prices of both the call and the put option should increase.
b. It would probably cost me $720
c. The investment of the package is an option price of zero, but the upside potential is greater since there is a higher probability that the asset will finish in the money
12. Interest rate increases are good for calls and bad for puts. The reason is that if a call is exercised in the future, we have to pay a fixed amount at that time. The higher the interest rate, the lower the present value of that fixed amount. The reverse is true for puts in that we receive a fixed amount.
14. I would be tempted to choose the high risk proposal.
11. The future price for oils is $90 per. Petrochemical will take a long position to hedge its cost of buying oil. Onnex will take a short position to hedge its revenue from selling oil. The benefit of future is the ability to lock in a riskless position without paying any money. The benefit of the option hedge is that you benefit if prices move in one direction without losing if they move in the other direction. However, this asymmetry comes at a price: the cost of the option.