INVESTMENTS
11th Edition
ISBN: 9781260689488
Author: Bodie
Publisher: MCG
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Chapter 22, Problem 3CP
Summary Introduction
To explain: The Comparison between futures contract and option contract and also explain that portfolio risk which can be modified by both.
Introduction: When the commodities are buying or selling at a predetermined value but for the future time this dealing is called future trading but call option provides a right to the buyer. If the trading conditions are not profitable then he will not exercise the option price.
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Address the similarity and differences between option and forward/futures contracts.
Identify the fundamental distinction between a futures contract and an option contract, and briefly explain the difference in the manner that futures and options modify portfolio risk.
Discuss the difference between forward and futures contracts, focusing on the pros and cons of each.
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- a) Futures contracts and options on futures contracts can be used to modify risk. Required:Identify the fundamental distinction between a futures contract and an option on a futures contract and explain the difference in the manner that futures and options modify portfolio risk.arrow_forwardExplain the difference between a put option and a short position in a futures contract.arrow_forwarda) Futures contracts and options on futures contracts can be used to modify risk.Required:Identify the fundamental distinction between a futures contract and an option on a futures contract and explain the difference in the manner that futures and options modify portfolio riskarrow_forward
- Explain what is meant by forward contracts and futures using examples. List the main advantages / disadvantages for their use.arrow_forwardDiscuss similarities and differences between futures contracts and forward contracts.arrow_forwardWhat is basis risk in relation to futures contract hegding?arrow_forward
- Briefly explain the pay-off structure of futures and options contract. Also make it more clear with the help of table.arrow_forwardBriefly explain the pay-off structure of futures and options contract. Also make it more clear with the help of a flowchart.arrow_forwardExplain what is meant by “initial margin” on a futures contractarrow_forward
- Discuss the advantages and disadvantages of using options to hedge as compared to using futures contracts.arrow_forwardWhat is the key difference between futures contracts and options?arrow_forwarda)define and explain convenience yield, and describe how it is incorporated into the futures pricing model. b)discuss the debate on whether risk premium should be included in the pricing of futures and forward contracts. c) define backwardation, normal backwardation, contango, and normal contango. d) discuss the relationship between the prices of puts, calls, and forward/futures contracts on the same underlying asset using the put-call-forward/futures parity. e) discuss the boundary conditions on the prices of American and European call option contracts on futures.arrow_forward
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