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					Define Notional     Underlying    Net Settlement          Little or No Initial Investment
       Financial Instrument       Derivative Instrument            Firm Commitment       Forecasted Transaction
       Speculation Cash Flow Hedge        Fair Value Hedge         FX Hedge
       Purchased Options, Written Options, Long Forwards, Short Forwards, Swaps, Futures Contracts
       European versus American versus Asian options
       Spot Price, Forward Price, Strike Price, Premium, Intrinsic Value, Time Value
       Freestanding, Embedded, Structured (tailormade rather than convential financing)
       Economic Hedges vs. Hedge Accounting               OCI versus Firm Commitment            Delta
Purchased                                              Purchased                 Purchased                                     Purchased
Call Option with $55 Strike and $5 Premium                Call        Sell Buy Put Option with $75 Strike and $5 Premium           Put       Buy   Sell
                                                        Derivative   Spot Strike                                                Derivative   Spot Strike      X
   $80                                                    Profit     Price Price    $80                                           Profit     Price Price     Axis
                                                           -$5        $0   $55          Profit                                     $70        $0   $75        0
   $70                                                                              $70
                                              Profit       -$5        $10 $55                                                      $60        $10  $75        0
   $60                                                                              $60
                                                           -$5        $20 $55                                                      $50        $20  $75        0
   $50                                                     -$5        $30 $55       $50                                            $40        $30  $75        0
   $40                                                     -$5        $40 $55       $40                                            $30        $40  $75        0
   $30                                                     -$5        $50 $55       $30                                            $20        $50  $75        0
                                                           $0         $60 $55                                                      $10        $60  $75        0
   $20                                                                              $20
                                                          $10         $70 $55                                                      $0         $70  $75        0
   $10                                                    $20         $80 $55       $10                                            -$5        $80  $75        0
    $0                           Settlement Spot          $30         $90 $55        $0 Settlement Spot                            -$5        $90  $75        0
  -$10                                                    $40        $100 $55      -$10                                            -$5       $100 $75         0
                                                          $50        $110 $55                                                      -$5       $110 $75         0
                                                          $60        $120 $55                                                      -$5       $120 $75         0
                                                          $70        $130 $55                                                      -$5       $130 $75         0

 Written                                                Written                  Written                                        Written
Call Option with $60 Strike and $5 Premium               Call        Buy Sell Put Option with $75 Strike and $5 Premium           Put         Sell Buy
                                                       Derivative    Spot Strike                                               Derivative    Spot Strike
   10                                                    Profit      Price Price   10                                            Profit      Price Price
                                                          $5          $5   $60      0                                            -$70         $0   $75
    0
                                                          $5          $15 $60                                                    -$60         $10  $75
  -10                                                                             -10
                                                          $5          $25 $60                                                    -$50         $20  $75
                                                          $5          $35 $60     -20                                            -$40         $30  $75
  -20
                                                          $5          $45 $60     -30                                            -$30         $40  $75
  -30                                                     $5          $55 $60                                                    -$20         $50  $75
                                                                                  -40
  -40                                                     $0          $65 $60                                                    -$10         $60  $75
                                                                                  -50
                                                         -$10         $75 $60                                                     $0          $70  $75
  -50                                                                             -60
                                                         -$20         $85 $60                                                     $5          $80  $75
  -60                                                    -$30         $95 $60     -70                                             $5          $90  $75
  -70                                                    -$40        $105 $60     -80                                             $5         $100 $75
                                                         -$50        $115 $60                                                     $5         $110 $75
                                                         -$60        $125 $60                                                     $5         $120 $75
                                                         -$70        $135 $60                                                     $5         $130 $75


  Long                                                  Long                     Short                                          Short
Forward    with Forward Price to buy at $70            Forward        Sell Buy Forward     with Forward Price to sell at $70   Forward       Buy     Sell
                                                       Derivative    Spot Fwd.                                                 Derivative    Spot    Fwd.
   80                                                    Profit      Price Price  80                                             Profit      Price   Price
                                                         -$70         $0   $70                                                    $70         $0     $70
   60                                                                             60
                                                         -$60         $10 $70                                                     $60         $10    $70
   40                                                    -$50         $20 $70     40                                              $50         $20    $70
   20                                                    -$40         $30 $70     20                                              $40         $30    $70
                                                         -$30         $40 $70                                                     $30         $40    $70
    0                                                    -$20         $50 $70      0                                              $20         $50    $70
  -20                                                    -$10         $60 $70    -20                                              $10         $60    $70
                                                          $0          $70 $70                                                     $0          $70    $70
  -40                                                                            -40
                                                         $10          $80 $70                                                    -$10         $80    $70
  -60                                                    $20          $90 $70    -60                                             -$20         $90    $70
  -80                                                    $30         $100 $70    -80                                             -$30        $100    $70
                                                         $40         $110 $70                                                    -$40        $110    $70
                                                         $50         $120 $70                                                    -$50        $120    $70
                                                         $60         $130 $70                                                    -$60        $130    $70
Derivatives: An Introduction by Robert A Strong, Edition 2 (Thomson South-Western, 2005, ISBN 0-324-27302-9)
Page 26

                                    Table 2-1 Microsoft Options
                            ITRADDAY PRICES FROM SEPTEMBER 15, 2003
                                  MICROSOFT STOCK PRICE = $28.51
                           Call (100 share blocks)           Put (100 share blocks)
                                                 Open                             Open
  Strike     Expiration    Volume      Last*    Interest   Volume       Last*    Interest
 20.00        Sep-03          0        8.60        462         0       4.00         51
 20.00         OCT            0        8.62       3079         0       0.00       13013
 20.00        Jan-04          0        8.63      28296        50       0.15       79265
 20.00         APR            0        8.70        337         0       0.20        465
 22.50         SEP            0        6.04        781         0       0.00        5920
 22.50         OCT            0        6.06       7050         0       0.05       35024
 22.50         JAN            0        6.10      36628        20       0.30       70461
 22.50         APR            0        6.50       1409         0       0.55        1338
 25.00         SEP           100       3.50      33022         0       0.00       45132
 25.00         OCT           14        3.70      49578         0       0.10       51522
 25.00         JAN           12        4.20      98562        10       0.70       140007
 25.00         APR            0        4.50       3300         0       1.10        4424
 27.50         SEP          1561       1.15      106054       66       0.10       43935
 27.50         OCT           152       1.60      156668       362      0.55       62400
 27.50         JAN          1010       2.40      126385        4       1.45       77798
 27.50         APR            0        3.00       3921        20       2.05        5279
 30.00         SEP           70        0.05      22885        56       1.55        9636
 30.00         OCT           326       0.45      107254        5       2.00       19620
 30.00         JAN           268       1.20      242287        0       2.75       157068
 30.00         APR           10        1.85       8517         0       3.30        2655
 32.50         SEP            0        0.00        74          0       3.90         94
 32.50         OCT            0        0.10      18469        150      4.20        3478
 32.50         JAN           11        1.50      131051        0       4.60       71365
 32.50         APR           67        1.00       4171         0       5.00        2704
 35.00         SEP            0        0.05         1          0       6.40         21
 35.00         OCT            0        0.05       7250         0       6.60        2218
 35.00         JAN            6        0.20      137170        0       6.80       62404
 35.00         APR            2        0.50       5103         0       7.00        895
* Bid price if no volume
Strong's Questions pp. 34-35 Using Microsoft Option Prices on Page 26


27. What is the premium of a JAN 25 purchased call?
    What is the spot price of Microsoft stock on September 15,
     Construct the net profit line of a single call across the settlement price rang


       What is the premium of a JAN 25 purchased put?
     Construct the net profit line of a single put across the settlement price range


28. What is the premium of a APR 30 written call?
    What is the spot price of Microsoft stock on September 15?
     Construct the net profit line of a single call across the settlement price rang


       What is the premium of a APR 30 written put?
           Construct profit line of line of a single put the settlement price range
     Construct the net the net profit a single put across across the settlement pric




27. What is the premium of a JAN 25 call?         $4.20
    What is the spot price of Microsoft stock on September 15?
       What is the premium of a JAN 25 put?                                                 $0.70

          Purchased                                               Purchased                Purchased
          Call Option with $25 Strike and $4.20 Premium               Call      Sell Buy Put Option with $25 Strike a
                                                                   Derivative  Spot Strike
              $120.00                                              Loss/gain   Price Price  $30.00
                                                                    -$4.20     $0.00 $25
              $100.00                                               -$4.20     $9.20 $25    $25.00
                                                                    -$4.20    $19.20 $25
               $80.00                                                                       $20.00
                                                                     $0.00    $29.20 $25
                                                                    $10.00    $39.20 $25    $15.00
               $60.00
         $60.00                                                                   $15.00
                                                      $20.00       $49.20   $25
         $40.00                                       $30.00       $59.20   $25   $10.00
                                                      $40.00       $69.20   $25
         $20.00                                       $50.00       $79.20   $25    $5.00
                                                      $60.00       $89.20   $25
          $0.00                                       $70.00       $99.20   $25    $0.00
                                                      $80.00      $109.20   $25
         -$20.00                                                                  -$5.00
                                                      $90.00      $119.20   $25
                                                     $100.00      $129.20   $25


28. What is the premium of a APR 30 written call?
    What is the spot price of Microsoft stock on September 15?
  Construct the net profit line of a single call across the settlement price rang


   What is the premium of a APR 30 written put?
  Construct the net profit line of a single put across the settlement price range




28. What is the premium of a APR 30 written call?
    What is the spot price of Microsoft stock on September 15?

   What is the premium of a APR 30 written put?
      Written                                         Written                   Written
     Call Option with $30 Strike and $1.85 Premium      Call       Buy   Sell Put Option with $30 Strike a
                                                     Derivative    Spot Strike
         $20.00                                      Loss/gain     Price Price     $5.00
                                                       $1.85        $0   $30
          $0.00                                        $1.85      $11.85 $30       $0.00
                                                       $1.85      $21.85 $30
        -$20.00                                                                   -$5.00
                                                       $0.00      $31.85 $30
                                                      -$10.00     $41.85 $30
        -$40.00                                                                  -$10.00
                                                      -$20.00     $51.85 $30
                                                      -$30.00     $61.85 $30     -$15.00
        -$60.00
                                                      -$40.00     $71.85 $30
        -$80.00                                       -$50.00     $81.85 $30     -$20.00
   -$80.00                                                                     -$20.00
                                                  -$60.00      $91.85   $30
  -$100.00                                        -$70.00     $101.85   $30    -$25.00
                                                  -$80.00     $111.85   $30
  -$120.00                                        -$90.00     $121.85   $30    -$30.00
                                                 -$100.00     $131.85   $30




  Long                                             Long                        Short
Forward      with Forward Price to sell at $70   Forward        Sell    Buy Forward
                                                 Derivative    Spot     Fwd.
  80                                             Loss/gain     Price    Price  80
                                                   -$70          $0     $70
  60                                                                           60
                                                   -$60         $10     $70
  40                                               -$50         $20     $70    40
  20                                               -$40         $30     $70    20
                                                   -$30         $40     $70
    0                                              -$20         $50     $70     0
  -20                                              -$10         $60     $70   -20
                                                     $0         $70     $70
  -40                                                                         -40
                                                    $10         $80     $70
  -60                                               $20         $90     $70   -60
  -80                                               $30        $100     $70   -80
                                                    $40        $110     $70
                                                    $50        $120     $70
                                                    $60        $130     $70
 eptember 15, 2003?
lement price range of $0 to $129.20



ement price range of $0.30 to $52.30



 eptember 15?
lement price range of $0 to $131.85



he settlement price range of $0 to $54.70




 eptember 15?                                  $28.51




                                                        Purchased
Put Option with $25 Strike and $0.70 Premium                Put         Buy     Sell
                                                         Derivative    Spot    Strike
                                                         Loss/gain     Price   Price
                                                          $24.00       $0.30    $25
                                                          $20.00       $4.30    $25
                                                          $16.00       $8.30    $25
                                                          $12.00      $12.30    $25
                                                           $8.00      $16.30    $25
                                                          $4.00      $20.30    $25
                                                          $0.00      $24.30    $25
                                                         -$0.70      $28.30    $25
                                                         -$0.70      $32.30    $25
                                                         -$0.70      $36.30    $25
                                                         -$0.70      $40.30    $25
                                                         -$0.70      $44.30    $25
                                                         -$0.70      $48.30    $25
                                                         -$0.70      $52.30    $25




 eptember 15?
lement price range of $0 to $131.85



ement price range of $0 to $130




       $1.85
 eptember 15?                                  $28.51


              $3.30
                                                         Written
Put Option with $30 Strike and $3.30 Premium                Put        Sell    Buy
                                                        Derivative    Spot    Strike
                                                        Loss/gain     Price   Price
                                                         -$24.00      $2.70    $30
                                                         -$20.00      $6.70    $30
                                                         -$16.00     $10.70    $30
                                                         -$12.00     $14.70    $30
                                                          -$8.00     $18.70    $30
                                                          -$4.00     $22.70    $30
                                                           $0.00     $26.70    $30
                                                           $3.30     $30.70    $30
                                                           $3.30     $34.70    $30
                                     $3.30      $38.70   $30
                                     $3.30      $42.70   $30
                                     $3.30      $46.70   $30
                                     $3.30      $50.70   $30
                                     $3.30      $54.70   $30




                                    Short
with Forward Price to buy at $70   Forward      Buy      Sell
                                   Derivative   Spot     Fwd.
                                   Loss/gain    Price    Price
                                      $70         $0     $70
                                      $60        $10     $70
                                      $50        $20     $70
                                      $40        $30     $70
                                      $30        $40     $70
                                      $20        $50     $70
                                      $10        $60     $70
                                       $0        $70     $70
                                     -$10        $80     $70
                                     -$20        $90     $70
                                     -$30       $100     $70
                                     -$40       $110     $70
                                     -$50       $120     $70
                                     -$60       $130     $70
Strong's Questions pp. 34-35 Using Microsoft Option Prices on Page 26


21. What is the premium of a APR 25 purchased call?
    What is the spot price of Microsoft stock on September 15,


       What is the time value on September 15, 2003
       What is the intrisic value on September 15, 2003




21. What is the premium of a APR 25 call?
    What is the spot price of Microsoft stock on September 15?
       What is the time value on September 15, 2003
       What is the intrisic value on September 15, 2003

        Purchased Call                                              9/15/03    9/15/03    9/15/03
          Call Option with $25 Strike and $4.50 Premium            Possible   Possible      Call
                                                                     Time     Intrinsic    Total
             $5.00                                                   Value      Value      Value
             $4.50                                                   $4.50      $0.00      $4.50
             $4.00                                                   $4.50      $0.00      $4.50
             $3.50
                                                                     $4.50      $0.00      $4.50
 $3.50
                                                $4.50     $0.00     $4.50
 $3.00
                                                $4.50     $0.00     $4.50
 $2.50
                                                $4.50     $0.00     $4.50
 $2.00                                          $4.50     $0.00     $4.50
 $1.50                                          $4.00     $0.50     $4.50
 $1.00                                          $3.00     $1.50     $4.50
 $0.50                                          $2.00     $2.50     $4.50
 $0.00                                          $1.00     $3.50     $4.50
                                                $0.99     $3.51     $4.50



Time value must always become zero when the option expires.

Intrinsic value is zero if the option expires out of the money and above zero if the option
80
60
40
20
 0
-20
-40
-60
-80
ed call?
n September 15, 2003?




                         $4.50
n September 15?                  $28.51

                         $0.99
                         $3.51

       9/15/03 9/15/03
      Possible
        Spot    Strike
        Price   Price
       $18.50    $25
       $19.50    $25
       $20.50    $25
            $21.50   $25
            $22.50   $25
            $23.50   $25
            $24.50   $25
            $25.50   $25
            $26.50   $25
            $27.50   $25
            $28.50   $25
            $28.51   $25   Actual Situation on September 15, 2003




d above zero if the option is settled in the money.




                                                                    $28.51


                                                                              Written
                                                                                 Put
                                                                             Derivative
                                                                             Loss/gain
                                                                              -$24.00
                                                                              -$20.00
                                                                              -$16.00
                                                                              -$12.00
                                                                               -$8.00
                                                                               -$4.00
                                                                                $0.00
                                                                                $3.30
                                                                                $3.30
                                                                                $3.30
                                                                                $3.30
                                                                                $3.30
                                                                                $3.30
                                                                                $3.30
       Short
      Forward
      Derivative
80    Loss/gain
         $70
60
         $60
40       $50
20       $40
         $30
 0       $20
-20      $10
          $0
-40
        -$10
-60     -$20
-80     -$30
        -$40
        -$50
        -$60
  Sell    Buy
 Spot    Strike
 Price   Price
 $2.70    $30
 $6.70    $30
$10.70    $30
$14.70    $30
$18.70    $30
$22.70    $30
$26.70    $30
$30.70    $30
$34.70    $30
$38.70    $30
$42.70    $30
$46.70    $30
$50.70    $30
$54.70    $30
Buy     Sell
Spot    Fwd.
Price   Price
  $0    $70
 $10    $70
 $20    $70
 $30    $70
 $40    $70
 $50    $70
 $60    $70
 $70    $70
 $80    $70
 $90    $70
$100    $70
$110    $70
$120    $70
$130    $70
Bob Jensen's Risk Graphs                          Hedge     Non-hedged   Net
Share Ownership with shares costing $60 each     Derivative    Item    Hedged
                                                 Loss/gain Loss/Gain Loss/Gain
    $80                                             $0         -$60     -$60   = Purchase Price - Spot Price on Date of Sale
    $60
                                                    $0         -$50     -$50   = Purchase Price - Spot Price on Date of Sale
                                                    $0         -$40     -$40   = Purchase Price - Spot Price on Date of Sale
    $40                                             $0         -$30     -$30   = Purchase Price - Spot Price on Date of Sale
    $20                                             $0         -$20     -$20   = Purchase Price - Spot Price on Date of Sale
     $0                                             $0         -$10     -$10   = Purchase Price - Spot Price on Date of Sale
                                                    $0           $0      $0    = Purchase Price - Spot Price on Date of Sale
   -$20
                                                    $0          $10      $10   = Purchase Price - Spot Price on Date of Sale
   -$40                                             $0          $20      $20   = Purchase Price - Spot Price on Date of Sale
   -$60                                             $0          $30      $30   = Purchase Price - Spot Price on Date of Sale
   -$80                                             $0          $40      $40   = Purchase Price - Spot Price on Date of Sale
                                                    $0          $50      $50   = Purchase Price - Spot Price on Date of Sale
                                                    $0          $60      $60   = Purchase Price - Spot Price on Date of Sale

Short Forward Speculation
          with Forward Price to sell at $70      Speculation
                                                  Derivative
   $80                                            Loss/gain
                                                     $70       = Forward Price - Spot Price on Settlement Date
   $60                                               $60       = Forward Price - Spot Price on Settlement Date
   $40                                               $50       = Forward Price - Spot Price on Settlement Date
                                                     $40       = Forward Price - Spot Price on Settlement Date
   $20                                               $30       = Forward Price - Spot Price on Settlement Date
                                                     $20       = Forward Price - Spot Price on Settlement Date
     $0
                                                     $10       = Forward Price - Spot Price on Settlement Date
   -$20                                               $0       = Forward Price - Spot Price on Settlement Date
                                                    -$10       = Forward Price - Spot Price on Settlement Date
   -$40                                             -$20       = Forward Price - Spot Price on Settlement Date
   -$60                                             -$30       = Forward Price - Spot Price on Settlement Date
                                                    -$40       = Forward Price - Spot Price on Settlement Date
                                                    -$50       = Forward Price - Spot Price on Settlement Date

Short Forward Hedge
          with Forward Price to sell at $70       Hedge          Hedged      Net
                                                 Derivative       Item     Hedged
   $80                                           Loss/gain      Loss/Gain Loss/Gain
                                                    $70           -$60       $10    = locked in gain due to the price hedge with a forward or futures contact
   $60
                                                    $60           -$50       $10    = locked in gain due to the price hedge with a forward or futures contact
   $40                                              $50           -$40       $10    = locked in gain due to the price hedge with a forward or futures contact
   $20                                              $40           -$30       $10    = locked in gain due to the price hedge with a forward or futures contact
                                                    $30           -$20       $10    = locked in gain due to the price hedge with a forward or futures contact
     $0                                             $20           -$10       $10    = locked in gain due to the price hedge with a forward or futures contact
   -$20                                             $10             $0       $10    = locked in gain due to the price hedge with a forward or futures contact
                                                     $0            $10       $10    = locked in gain due to the price hedge with a forward or futures contact
   -$40
                                                   -$10            $20       $10    = locked in gain due to the price hedge with a forward or futures contact
   -$60                                            -$20            $30       $10    = locked in gain due to the price hedge with a forward or futures contact
   -$80                                            -$30            $40       $10    = locked in gain due to the price hedge with a forward or futures contact
                                                   -$40            $50       $10    = locked in gain due to the price hedge with a forward or futures contact
                                                   -$50            $60       $10    = locked in gain due to the price hedge with a forward or futures contact

Put Option Speculation
          with $75 Strike Price and $5 Premium   Speculation
                                                  Derivative
   $80                                            Loss/gain
   $70                                              $70        = Strike Price - Spot Price on Settlement Date
                                                    $60        = Strike Price - Spot Price on Settlement Date
   $60                                              $50        = Strike Price - Spot Price on Settlement Date
   $50                                              $40        = Strike Price - Spot Price on Settlement Date
   $40                                              $30        = Strike Price - Spot Price on Settlement Date
   $30                                              $20        = Strike Price - Spot Price on Settlement Date
                                                    $10        = Strike Price - Spot Price on Settlement Date
   $20
                                                      $0       = Strike Price - Spot Price on Settlement Date
   $10                                               -$5       = Strike Price - Spot Price on Settlement Date
     $0                                              -$5       = Strike Price - Spot Price on Settlement Date
   -$10                                              -$5       = Strike Price - Spot Price on Settlement Date
                                                     -$5       = Strike Price - Spot Price on Settlement Date
                                                     -$5       = Stike Price - Spot Price on Settlement Date

Put Option Hedge
          with $75 Strike and $5 Premium
                                                 Derivative       Item     Hedged
   $80                                           Loss/gain      Loss/Gain Loss/Gain
                                                   $70            -$60       $10
   $60
                                                   $60            -$50       $10
   $40                                             $50            -$40       $10
   $20                                             $40            -$30       $10
                                                   $30            -$20       $10
     $0                                            $20            -$10       $10
   -$20                                            $10              $0       $10
   -$20
                                                                  $0          $10         $10
   -$40
                                                                 -$5          $20         $15
   -$60                                                          -$5          $30         $25
   -$80                                                          -$5          $40         $35
                                                                 -$5          $50         $45
                                                                 -$5          $60         $55
                                                                 -$5          $70         $65

Bob Jensen's Risk Graphs
Firm commitment to sell at $60 per share (a short sale)
          This is called a short sale when you do not own the shares at the time of making a firm commitment.
                                                               Hedge Non-Hedged           Net
                                                             Derivative       Item      Hedged
                                                             Loss/gain Loss/Gain Loss/Gain
    $80                                                          $0            $60        $60     = Sale Price - Spot Price on date of settlement
    $60
                                                                 $0            $50        $50     = Sale Price - Spot Price on date of settlement
                                                                 $0            $40        $40     = Sale Price - Spot Price on date of settlement
    $40                                                          $0            $30        $30     = Sale Price - Spot Price on date of settlement
    $20                                                          $0            $20        $20     = Sale Price - Spot Price on date of settlement
     $0                                                          $0            $10        $10     = Sale Price - Spot Price on date of settlement
                                                                 $0             $0        $0      = Sale Price - Spot Price on date of settlement
   -$20
                                                                 $0           -$10       -$10     = Sale Price - Spot Price on date of settlement
   -$40                                                          $0           -$20       -$20     = Sale Price - Spot Price on date of settlement
   -$60                                                          $0           -$30       -$30     = Sale Price - Spot Price on date of settlement
   -$80                                                          $0           -$40       -$40     = Sale Price - Spot Price on date of settlement
                                                                 $0           -$50       -$50     = Sale Price - Spot Price on date of settlement
                                                                 $0           -$60       -$60     = Sale Price - Spot Price on date of settlement

Long Forward Hedge with Forward Price to buy at $50           Hedge        Hedged      Net
                                                             Derivative     Item     Hedged
   $80                                                       Loss/gain    Loss/Gain Loss/Gain
   $60                                                         -$50          $60       $10
                                                               -$40          $50       $10
   $40                                                         -$30          $40       $10
   $20                                                         -$20          $30       $10
    $0                                                         -$10          $20       $10
                                                                 $0          $10       $10
  -$20                                                          $10           $0       $10
  -$40                                                          $20         -$10       $10
  -$60                                                          $30         -$20       $10
                                                                $40         -$30       $10
  -$80                                                          $50         -$40       $10
                                                                $60         -$50       $10

                                                               $70          -$60       $10
Call Option Hedge with $55 Strike and $5 Premium              Hedge        Hedged      Net
                                                             Derivative     Item     Hedged
   $100                                                      Loss/gain    Loss/Gain Loss/Gain
    $80                                                         -$5          $60       $55
                                                                -$5          $50       $45
    $60                                                         -$5          $40       $35
    $40                                                         -$5          $30       $25
    $20                                                         -$5          $20       $15
     $0                                                         -$5          $10        $5
                                                                -$5           $0       -$5
   -$20
                                                               $20          -$10       $10
   -$40                                                        $30          -$20       $10
   -$60                                                        $40          -$30       $10
   -$80                                                        $50          -$40       $10
                                                               $60          -$50       $10
                                                               $70          -$60       $10
                                                               $80          -$70       $10


Forecasted Transaction to Buy                                 Hedge     Forecasted         Net
          at an unknown spot price                           Derivative Transaction     Hedged
                                                             Loss/gain      Cost         Price
      $0                                                        $0           $0            $0     = Purchase Price at spot
                                                                $0          -$10          -$10    = Purchase Price at spot
    -$20
                                                                $0          -$20          -$20    = Purchase Price at spot
    -$40                                                        $0          -$30          -$30    = Purchase Price at spot
                                                                $0          -$40          -$40    = Purchase Price at spot
    -$60
                                                                $0          -$50          -$50    = Purchase Price at spot
    -$80                                                        $0          -$60          -$60    = Purchase Price at spot
                                                                $0          -$70          -$70    = Purchase Price at spot
   -$100
                                                                $0          -$80          -$80    = Purchase Price at spot
   -$120                                                        $0          -$90          -$90    = Purchase Price at spot
   -$140                                                        $0         -$100         -$100    = Purchase Price at spot
                                                                $0         -$110         -$110    = Purchase Price at spot
                                                                $0         -$120         -$120    = Purchase Price at spot

Long Forward Hedge
           with forward price to buy at $70                  Hedge     Forecasted       Net
                                                            Derivative Transaction    Hedged
     $60                                                    Loss/gain      Cost        Price
     $40                                                      -$70          $0         -$70       = Locked in price due to hedge of forecasted transaction
     $20                                                      -$60         -$10        -$70       = Locked in price due to hedge of forecasted transaction
                                                              -$50         -$20        -$70       = Locked in price due to hedge of forecasted transaction
      $0
                                                              -$40         -$30        -$70       = Locked in price due to hedge of forecasted transaction
    -$20
                                                              -$30         -$40        -$70       = Locked in price due to hedge of forecasted transaction
    -$40                                                      -$20         -$50        -$70       = Locked in price due to hedge of forecasted transaction
    -$60                                                      -$10         -$60        -$70       = Locked in price due to hedge of forecasted transaction
    -$80                                                        $0         -$70        -$70       = Locked in price due to hedge of forecasted transaction
   -$100                                                       $10         -$80        -$70       = Locked in price due to hedge of forecasted transaction
   -$120                                                       $20         -$90        -$70       = Locked in price due to hedge of forecasted transaction
   -$140                                                       $30        -$100        -$70       = Locked in price due to hedge of forecasted transaction
                                                               $40        -$110        -$70       = Locked in price due to hedge of forecasted transaction
                                                               $50        -$120        -$70       = Locked in price due to hedge of forecasted transaction

Bob Jensen's Risk Graphs                                     Hedge Non-Hedged      Net
Share Ownership with shares costing $60 each                Derivative  Item     Hedged
                                                            Loss/gain Loss/Gain Loss/Gain
    $80                                                        $0       -$60      -$60
    $60
                                                               $0       -$50      -$50
                                                               $0       -$40      -$40
    $40                                                        $0       -$30      -$30
    $20                                                        $0       -$20      -$20
     $0                                                        $0       -$10      -$10
                                                               $0         $0       $0
   -$20
                                                               $0        $10       $10
   -$40                                                        $0        $20       $20
   -$60                                                        $0        $30       $30
   -$80                                                        $0        $40       $40
                                                               $0        $50       $50
                                                               $0        $60       $60

Writen (Covered) call with $60 stike price and $5 Premium    Hedge        Hedged      Net
                                                            Derivative     Item     Hedged
   $80                                                      Loss/gain    Loss/Gain Loss/Gain
                                                                $5         -$60      -$55
   $60
                                                                $5         -$50      -$45
   $40                                                          $5         -$40      -$35
   $20                                                          $5         -$30      -$25
                                                                $5         -$20      -$15
    $0                                                          $5         -$10       -$5
  -$20                                                          $5           $0        $5
                                                               -$5          $10        $5
  -$40
                                                              -$15          $20        $5
  -$60                                                        -$25          $30        $5
  -$80                                                        -$35          $40        $5
                                                              -$45          $50        $5
                                                              -$55          $60        $5

Collar between $60 and $80 per share
Purchased call with a $80 strike price and $2 premium
Writen (Covered) call with $60 stike price and $5 Premium    Written      Hedged Purchased      Net
                                                              Call         Item       Call    Hedged
   $60
   $80                                                      Loss/gain    Loss/Gain Loss/Gain Loss/Gain
                                                                $5         -$60       -$2      -$57
   $60
   $40                                                          $5         -$50       -$2      -$47
   $40
   $20                                                          $5         -$40       -$2      -$37
   $20                                                          $5         -$30       -$2      -$27
    $0                                                          $5         -$20       -$2      -$17
    $0                                                          $5         -$10       -$2       -$7
  -$20
  -$20                                                          $5           $0       -$2        $3
  -$40                                                         -$5          $10       -$2        $3
  -$40
                                                              -$15          $20       -$2        $3
  -$60
  -$60                                                        -$25          $30        $8       $13
  -$80                                                        -$35          $40       $18       $23
                                                              -$45          $50       $28       $33
                                                              -$55          $60       $38       $43

Example 5 from Appendix B beginning in Paragraph 131                        2.25%
Variable rate investment at LIBOR+2.25%                       Swap          Bond         Net
                                                            Derivative   Investment    Hedged
   $400,000                                                 Loss/gain     Loss/Gain   Loss/Gain    LIBOR
   $350,000                                                 $166,250       $56,250    $222,500       0.00%
   $300,000                                                 $141,250       $81,250    $222,500       1.00%
   $250,000                                                 $116,250      $106,250    $222,500       2.00%
   $200,000                                                  $91,250      $131,250    $222,500       3.00%
   $150,000                                                  $66,250      $156,250    $222,500       4.00%
   $100,000                                                  $41,250      $181,250    $222,500       5.00%
    $50,000                                                  $16,250      $206,250    $222,500       6.00%
         $0                                                  -$8,750      $231,250    $222,500       7.00%
   -$50,000
   -$50,000                                              -$33,750    $256,250   $222,500    8.00%
  -$100,000                                              -$58,750    $281,250   $222,500    9.00%
  -$150,000                                              -$83,750    $306,250   $222,500   10.00%
                                                        -$108,750    $331,250   $222,500   11.00%

CPE Page 17 Futures Contract Example

Oil purchase of 100,000 bbls at spot                    Derivative     Item     Hedged
                                                        Loss/gain    Loss/Gain Loss/Gain
     $0                                                    $0            $0        $0
                                                           $0           -$5       -$5
   -$10
                                                           $0          -$10      -$10
   -$20                                                    $0          -$15      -$15
                                                           $0          -$20      -$20
   -$30
                                                           $0          -$25      -$25
   -$40                                                    $0          -$30      -$30
                                                           $0          -$35      -$35
   -$50
                                                           $0          -$40      -$40
   -$60                                                    $0          -$45      -$45
   -$70                                                    $0          -$50      -$50
                                                           $0          -$55      -$55
                                                           $0          -$60      -$60

CPE Page 17 Futures Contract Example

Short Futures Hedge with Forward Price to sell at $17    Hedge        Hedged      Net
                                                        Derivative     Item     Hedged
   $60                                                  Loss/gain    Loss/Gain Loss/Gain
                                                          -$17           $0      -$17
   $40                                                    -$12          -$5      -$17
   $20                                                     -$7         -$10      -$17
                                                           -$2         -$15      -$17
    $0                                                      $3         -$20      -$17
                                                            $8         -$25      -$17
  -$20
                                                           $13         -$30      -$17
  -$40                                                     $18         -$35      -$17
                                                           $23         -$40      -$17
  -$60                                                     $28         -$45      -$17
  -$80                                                     $33         -$50      -$17
                                                           $38         -$55      -$17
                                                           $43         -$60      -$17

				
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