Essay About Future Contract And Key Advantage Of Thei

Derivative Final Exam
衍生品重点Chapter 11. A future contract is an agreement to buy or sell an asset at a certain time in the future for a certain price.2. OTC market, over-the-counter is an important alternative to exchange. It is a telephone- and computer- linked network of dealers. A key advantage of thei over-the-counter market is that the terms of a contract do not have to be those specified by an exchange. A disadvantage is that there is usually some credit risk in an OTC trade.3. A forward contract is similar to a future contracts in that it is an agreement to buy or sell an asset at a certain time in the future for a certain price. But, forward contracts trade in the OTC market.4. Options are traded both on exchanges and in the OTC markets. There are two types of option: calls and puts. A call option gives the holder the right to buy an asset by a certain date for a certain price. A put option gives the holder the right to sell an asset by a certain date for a certain price. The price in the contract is known as the exercise price or the strike price; the date in the contract is known as the expiration date or the maturity date. A European option can be exercised only on the maturity date; an American option can be exercised at any time during its life.5. Hedgers use futures, forwards, and options to reduce the risk that they face from potential future movements in a market variable.6. Speculators use them to bet on the future direction of a market variable. 7. Arbitrageurs take offsetting positions in two or more instruments to lock in a profit. Quiz problem1.1 What is the difference between a long futures position and a short futures position?A trader who enters into a long futures position is agreeing to buy the underlying asset for a certain price a t a certain time in the future.A trader who enters into a short futures position is agreeing to sell the underlying asset for a certain price at a certain time in the future.1.2 Explain carefully the difference between (a) hedging, (b) speculation, and (c) arbitrage.A company is hedging when it has an exposure to the price of an asset and takes a position in futures or options markets to offset the exposure.In a speculation the company has no exposure to offset. It is betting on the future movements in the price of the asset.Arbitrage involves taking a position in two or more different markets to lock in a profit.1.3 What is the difference between (a) entering into a long futures contract when the futures price is $50 and (b) taking a long position in a call option with a strike price of $50?In (a) the investor is obligated to buy the asset for $50 and does not have a choice. In (b) the investor has the option to buy the asset for $50 but does not have to exercise the option.1.6 You would like to speculate on a rise in the price of a certain stock. The current stock price is $29 and a three-month call with a strike price of $30 costs $2.90. You have $5800 to invest. Identify two alternative strategies. Briefly outline the advantages and disadvantages of each.