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Q9. How would you hedge the risk of a price rise using a derivative?
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- If you have long position in one asset and you want to hedge the risk of price drop in that asset while still having the upside in case the asset price goes up, what sort of derivative trading will you do? Explain in brief with payoff diagram.Let C be the price of a call option to purchase a security whose present price is S. Explain why C is less than or equal to S. I'm just thinking it wouldn't make financial sense to pay more for the call option than the present price of the security. I'm not sure if there is more of an explanation that is needed. I was also wondering is there any time when it would be favorable to pay more for the call option than the present price of the security?Below is a chart with profit/loss on the vertical axis, and the $/£ exchange rate on the horizontal axis. The solid line shows the profit/loss schedule for a: Question 8 options: put option in isolation (e.g. used for speculating that the pound will depreciate) None of the above covered call option (a call option is used as a hedge) covered put option (a put option is used as a hedge)
- which one is correct please confirm? Q20: The main advantage of using options on futures contracts rather than the futures contracts themselves is tha interest rate risk is controlled while preserving the possibility of gains. "interest rate risk is controlled, while removing the possibility of losses" "interest rate risk is not controlled, but the possibility of gains is preserved." "interest rate risk is not controlled, but the possibility of gains is lost."Q7. Using the arbitrage theorem, find the value of C for the data given So = 90, S1a= 130, S1b = 75, K= 105. Q8. Derive the first order partial derivative of the Black-Scholes option cost C with respect to r.Required (a)Discuss TWO (2) rationales of hedging with a derivative instead of disposing of the shares at market price. (b) Calculate the number of contracts and determine the strategy to hedge against your riskexposure with each of the alternatives above. (c) Assume that it is out of your expectation that the interest rate does not decline and ABC Financial Bhd.’s share price appreciated to RM7.00 due to economic recovery.Compute the payoff for both alternatives above and determine the better alternative with appropriate justification.
- Suppose that C is the price of a European call option to purchase a security whose present price is S. Show that if C>S then there is an opportunity for arbitrage (i.e. risk-less profit). You may assume the interest rate is r=0 so that the present value calculations are unnecessary.Which of the following is/are true about the current market value of a derivative instrument? On maturity, it coincides with the payoff It is always positive, so that when you buy a derivative, you always pay some amount At the time of establishing the position, market value can be positive, negative or zero Notional is positively related to the magnitude of the market value, unless the latter is zero None of the other choicesIf you buy 2 Eurodollar futures contracts will your contracts gain in value when LIBOR rates increase or decrease?
- Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract? a. Forward contracts can be tailored, while future contracts are non-standardized. b. Forward contracts are classified as exotic derivatives. c. Futures contracts are exchange-traded contracts, daily settlements are implemented by the clearing house. d. More flexibility as the buyer can decide whether or not to exercise the contract at maturity. e. For futures contracts, all cash flows are required to be paid at one time on contract maturity.which one is correct please confirm? Q19: Using Futures contract to transfer price risk is called diversifying. hedging speculation arbitragea) Assume that call currency option enable to buy of dollar for Shs. 50.00 while it is quotedat Shs. 50.70 in the spot market, and premium paid for call currency option is Shs. 1.00.a)Calculate the intrinsic value of the call? b) Discuss the value of hedging to a firm.