Identify two alternative strategies, one involving an investment in the stock and the other involving investment in the option. What are the potential gains and losses from each?
One strategy would be to buy 200 shares. Another would be to buy 2,000 options. If the share price does well the second strategy will give rise to greater gains. For example, if the share price goes up to $40 you gain [2 000 ($40 $30)] $5 800 $14 200 from the second strategy and only 200 ($40 $29) $2 200 from the first strategy. However, if the share price does badly, the second strategy gives greater losses. For example, if the share 衍生品与对冲 price goes down to $25, the first strategy leads to a loss of 200 ($29 $25) $800 whereas the 衍生品与对冲 second strategy leads to a loss of the whole $5,800 investment. This example shows that options contain built in leverage.
Suppose you own 5,000 shares that are worth $25 each. How can put options be used to provide you with insurance against a decline in the value of your holding over the next four months?
You could buy 50 put option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be less than $25, you can exercise the options and sell the shares for $25 each.
When first issued, a stock 衍生品与对冲 provides funds for a company. Is the same true of 衍生品与对冲 an
exchange-traded stock option? Discuss.
An exchange-traded stock option provides no funds for the company. It is a security sold by one investor to another. The company is not involved. By contrast, a stock when it is first issued is sold by the company to investors and does provide funds for the company.
Explain why a futures contract can be used for either speculation or hedging.
If an investor has an exposure to the price of an asset, he or she can hedge with futures
contracts. If the investor will gain when the price decreases and lose when the price increases, a long futures position will hedge the risk. If the investor will lose when the price decreases and gain when the price increases, a short 衍生品与对冲 futures position will hedge the risk. Thus either a 衍生品与对冲 long or a short futures position can be entered into for hedging purposes.
If the investor has no exposure to the price of the underlying asset, entering into a futures contract is speculation. If the investor takes a 衍生品与对冲 long position, he or she gains when the asset’s price increases and loses when it decreases. If the investor 衍生品与对冲 takes a short position, he or she loses when the asset’s price increases and gains when it decreases.
Suppose that a March call option to buy a share for 衍生品与对冲 $50 costs $2.50 and is held until March. Under what circumstances will the holder of the option make 衍生品与对冲 a profit? Under what
circumstances will the option be exercised? Draw a diagram showing how the profit on a long position in the option depends on the stock price at the maturity of the option.
The holder of the option will gain if the price of the stock is above $52.50 in March. (This ignores the time value of money.) The option will be exercised if the price of the stock is
What is the difference between 衍生品与对冲 a long forward position and a short forward position?
When a trader enters into a long forward contract, she is agreeing to buy the underlying asset for a certain price at a certain time in the future. When a trader enters into a short forward contract, she is agreeing to sell the underlying asset for a certain 衍生品与对冲 price at a certain time in the future.
Explain carefully the difference between hedging, speculation, and arbitrage.
A trader is hedging when she has an exposure to the price 衍生品与对冲 of an asset and takes a position in a derivative to offset the exposure. In a speculation the trader has no exposure to offset. She is betting on the future movements in the price of the asset. Arbitrage involves taking a position in two or more different markets to lock in a profit.
What is the difference between entering into a long forward contract when the forward 衍生品与对冲 price is $50 and taking a long position in a call option with a strike price of $50?
In the first case the trader is obligated to buy the asset for $50. (The trader does not have a choice.) In the second case the trader has an 衍生品与对冲 option to buy the asset for $50. (The trader does 衍生品与对冲 衍生品与对冲 not have to exercise the option.)
Explain carefully the difference between selling a call option and buying a put option.
Selling a call option involves giving someone else the right to buy an asset from you. It gives you a payoff of
max(ST K 0) min(K ST 0)
Buying a put option involves buying an option from someone else. It gives a payoff of max(K ST 0)
In both cases the potential payoff isK ST. When you write a call option, the payoff is negative or zero. (This is because the counterparty chooses 衍生品与对冲 whether to exercise.) When you buy a put option, the payoff is zero or positive. (This is because you choose whether to exercise.)
An investor enters into a short 衍生品与对冲 forward contract to sell 100,000 British pounds for US dollars at an exchange rate of 1.5000 US dollars 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?