How do derivatives hedge risk?

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: What Is Hedge against Marketplace Uncertainty?

A: Hedging is referred as the risk management strategy used to offset losses in investments by taking…

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 does vega measure? What can you tell from vega value? Can the vega of a derivatives portfolio…

A: Option gives right to buy or sell an underlying asset to the buyer of the option at strike price. A…

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: The derivatives market allows for

A: Derivatives refer to the contract among various parties whose value depends on a set of assets or a…

Q: Define speculation in derivatives

A: Individuals and Firms often trade in the derivatives market when they want to enter a trade on a…

Q: Explain how alternative investments can act as a hedge against inflation.

A: Alternative Investments:  Stocks, bonds are financial instruments that fall under the category of a…

Q: Why the financial instruments do often called derivatives?

A:

Q: How are changes in the fair value of an option accounted for in a cash flow hedge? In a fair value…

A: Cash flow hedge: Cash flow hedge is the process of reducing or eliminating the risk of charges in…

Q: What is the relation between the expected rate of return and the required rate of return as they…

A: In the world of finance in general and investments in particular we often look at a security’s…

Q: What is equity security?

A: Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from…

Q: Illustrate Derivatives?

A: Answer: A derivative is described as an investing technique defined to help the financial expert…

Q: Identify the major derivative securities used to hedge against risk.

A: Answer: Usually, the primary aim of derivative securities trading is to hedge risk against the…

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: What is margin requirement (for futures)?

A: Solution:- A Margin Requirement is the share of marginable securities that an investor should pay…

Q: What is a futures contract?

A: Derivatives: Derivatives are some financial instruments which are meant for managing risk and…

Q: Explain the Use of Derivatives to Hedge Portfolio Risk?

A: The contract whose value derives from the fluctuation of values of the underlying assets is called…

Q: What is the difference between pure arbitrage and risk arbitrage?

A: Pure arbitrage refers to make a riskless profit without taking any risk while risk arbitrage refers…

Q: What is market risk premium?

A: Market risk premium is an additional return investor will receive for holding the additional risk in…

Q: What is counterparty risk?

A: Counterparty risk can exist in trading, credit, investment.

Q: What is marketable securities?

A: Balance sheet has different components. On the basis of liquidity, cash and cash equivalents are the…

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: What apparatus exists to facilitate purchases and sales of futures contracts?

A: The question is based on the concept of trading in future contract in derivative segment of stock…

Q: What is futures market?

A: A market where both buyer and seller interact in order to buy and selling of futures contracts and…

Q: What is equity risk premium?

A: The risk premium is the extra return an investor receives for taking market risk. We know that risk…

Q: es tr ice of an individual security in such a market?

A: Market is efficient that means that information about the security is fully available in market.

Q: Immunization is intended to protect a portfolio against interest rate risk. What should be done? How…

A: Immunization is the strategy under which the checks on the interest rates are provided to the firms.…

Q: Is Bitcoin considered as a financial derivative?

A: Finance is the source for business and is required for the flow of money for any operations.

Q: Describe Derivatives Used to Hedge Risk.

A: Definition:   Derivatives: The contract whose value derives from the fluctuation of values of the…

Q: How should derivatives be used in risk management? What problems can occur?

A: Derivatives are financial instruments that have values derived from other assets like stocks, bonds,…

Q: What is the importance of market risk premium?

A: Market risk premium Variance of the market return and the risk-free rate. It depicts the equity…

Q: What are advantages of futures options over spot options?

A: Futures: The contract to buy or sell assets at predefined prices but will be paid and delivered…