Answered: Explain why speculating in derivatives,…

Explain why speculating in derivatives, futures contracts and options is not appropriate for the typical, long-term investor.

Personal Finance

13th Edition

ISBN:9781337669214

Author:GARMAN

Publisher:GARMAN

Chapter16: Real Estate And High-risk Investments

Section16.6: Investing In Options And Commodity

Problem 4CC

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Explain why speculating in derivatives, futures contracts and options is not appropriate for the typical, long-term investor. What would be this long-term investor's optimal investment instruments?

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My question is for a synthetic call option why do we need to borrow the present value of the strike price and what does it mean in a simple language explanation. Similarly why do we need to lend the present value of the stock at risk-free rate and what does it mean in simple language explanation? Please also clarify the significance of risk free rate? Why is it used in put call parity. Synthetic Call Option: If an investor believes that a call option is over-priced, then he/she can sell the call on the market and replicate a synthetic call. Borrow the present value of the strike price at the risk free rate and purchase the underlying stock and a put. Synthetic Put Option: Similar to the synthetic call option. A synthetic put can be created by re-arranging the put-call parity relationship, if the trader believes the put is overvalued. Synthetic Stock: A synthetic stock can also be created by rearranging the put-call parity identity. In this case, the investor will buy the…
Discuss the factors giving rise to an inverted futures market for a storable versus a non-storable commodity. What are the implications for a hedger?
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We understand standard deviation of returns as a measure of risk and rational investors would like to minimize risk. Notwithstanding this, you may have read that as the standard deviation of returns of the underlying asset increases the value of an option rises. If standard deviation is a measure of risk and investors do not particularly like it, why does it lead to an increase in an option's value?
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