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- To hedge, a user of an energy resource wants price protection from rising prices. The user decides to buy a call option to protect against rising prices. But they want a lower cost of hedging and decide to construct a collar strategy. What other action should they take along with the purchase of the call option? Buy a call option Sell a call option Buy a put option Sell a put option None of the aboveWe 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?Explain why the delta hedging of a negative gamma options position loses money.
- Why are options being sold at prices higher than their strike value?If you observe open interest is increasing and prices are moving higher, which of the following would be the most likely explanation? A. New short positions are entering the market B. Old short positions are exiting the market C. New long positions are entering the market D. Old long positions are exiting the marketCompanies often have to increase their initial investment costs to obtain real options. Whymight this be so, and how could a firm decide whether it was worth the cost to obtain agiven real option?
- Why must real options have positive value? (Select all the choices that apply.) A. Having the real option but not the obligation to act is valuable. B. Real options must have positive value because they can always be sold to recover the initial investment. C. Real options must have positive value because they are only exercised when doing so would increase the value of the investment. D. If exercising the real option would reduce value, managers can allow the option to go unexercised.Which of the following statements is FALSE? A. You invest today only when the NPV of investing today exceeds the value of the option of waiting, which from option pricing theory we know to be always positive. B. When you do not have the option to wait, it is optimal to invest in any positive−NPV project. C. One way to see why you sometimes choose not to invest in a positive−NPV project is to think about the decision of when to invest as a choice between two mutually exclusive projects: (1) invest today or (2) wait. D. When you have the option of deciding when to invest, it is usually optimal to invest only when the NPV is positive but close to zero.Why do options typically sell at prices higher than their exercise values?
- Is the statement that a pproject that is unacceptable today might be acceptable tommorrow given a change in market returns correct?If all investors believe that the market is efficient, could that eventually lead to less efficiency in the market? Explain with an example.Which of the following strategy would you adopt if you expect the fall in prices of a stock? A. Buy a call B. Sell a call C. Sell a put D. Buy a future