Discuss the advantages and disadvantages of using options to hedge as compared to using futures contracts.

Q: Explain what a “riskless hedge” is and how the riskless hedge concept is used in theBlack–Scholes…

A: Riskless hedging: It is the process of buying the stock as well as sell call options simultaneously…

Q: Describe each of the following derivative instruments and suggest a specific risky situation that…

A: All of these derivatives instruments defined below.

Q: Describe the basis of Futures contracts and discuss the potential risks and rewards.

A: An agreement where there are two parties, say one is a buyer and another one is a seller decides to…

Q: Explain the difference between a call option and a long position in a futures contract.

A: Both the options and futures are derivative contracts.

Q: Critically explain with examples the concept of futures and the differences between options and…

A: Futures in a type of derivative product in which there is a contract that is agreed in between two…

Q: Swaps are more useful for hedging, while options and futures are more suitable for…

A: Hedging is the process of buying or selling an asset to compensate the risk arising out of another…

Q: What are the main differences between options and warrant contracts and forward and futures…

A: The difference among options and warrant contract:

Q: How can derivative security be used to hedge portfolio risk?

A: A derivative is depicted as an investment procedure outlined to assist the financial specialist to…

Q: What is basis risk in relation to futures contract hegding?

A: Basis Risk:Basis risk is a financial risk which arises from the incompatibility in the positions of…

Q: What is the purpose of initial and maintenance margins? How does marking to market affect the amount…

A: Margins: Margins allow individuals who'd like to trade to borrow funds from brokers or brokerage…

Q: Explain how a company can use the futures market to hedge against rising rawmaterials prices.

A: Answer: If the price of key raw materials is rising, then a company can hedge against the risk by…

Q: Explain the main differences between futures contracts and forward contracts.

A: Solution- Future Contract-        A derivative may be a legal agreement to shop for or sell a…

Q: Discuss two similarities and two differences between a futures contract and a forward contract. When…

A: Future Contract: A futures contract is a legally binding agreement to purchase or sell a certain…

Q: Describe how a risk-free hedge portfolio can be created using stocks and options.

A: A risk-free hedge portfolio can be created by the usage of stocks and options by the following…

Q: The most popular type of derivative securities is options. Discuss what is an option? Define calls…

A: Option is a type of derivative instrument which gives a right, not the obligation to the holder to…

Q: How does the put-call parity formula for a futures option differ from put-call parity for an option…

A: Put call parity is defined as the holding of the short European put as well as long European call of…

Q: illustrate the use of derivatives to hedge portfolio risk with an example?

A: A derivative is depicted as an investment procedure outlined to assist the financial specialist to…

Q: Show graphically and explain the profits and losses of buying futures relative to buying call…

A: If an investor buys Future contract or Call Option Suppose the investor buys a call option at…

Q: What is the key difference between futures contracts and options?

A: Both futures contracts and options are derivative instruments. Their value depends on the value of…

Q: What is a futures contract? What are the key differences between forward andfutures contracts?

A: Futures Contract are the Promises made between two parties on the platform called exchange for the…

Q: what are the advantages and disadvantages of covered call and protective put which are options…

A: Due to uncertain factors, security prices fluctuate regularly which creates risk for the investors.…

Q: What is ‘basis’ and what is ‘basis risk’ within the context of futures hedging. Briefly discuss what…

A: Future markets are derivative products that means they derive the prices from the underlying assets…

Q: Explain why a futures contract can be used for either hedging or speculation.

A: Hedging and speculation are the strategies which are used by investors while trading. Hedging is…

Q: Changes in what price lead to gains and/or losses in futures contracts?

A: changes in underlying asset leads to gains and/or losses in future contracts.

Q: Why might individuals purchase futures contracts rather than the underlying asset?

A: Futures are derivative contracts, the price movement of a derivative contract (like futures) is…

Q: Forwards and Futures: How are forwards and futures similar? How are they different? Briefly explain…

A: A forward contract is referred to the customized contract, which is between the two parties for…

Q: Describe how a risk free hedge portfolio can be created using stock and options.

A: Introduction: Hedging is one type of strategy in the risk management system. It is a strategy…

Q: "Financial Derivative and Risk Management" Why are the probabilities of stock price movements not…

A: Option prices are basically the sum of the intrinsic and time value of an option. The price…

Q: Briefly explain the pay-off structure of futures and options contract. Also make it more clear with…

A: Payoff is profit and loss forecast or likely profit with change in underlying price. Whenever…

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.