- long forward position means that the holder has the obligation to buy an asset at a given date
- short forward position means that the holder has the obligation to sell an asset at a given date
- hedging means reducing the risk
- speculation means taking risks to create an opportunity for profit, by betting on a future chaneg of the price of an asset
- arbitrage means making risk free profit by detecting price inconsistencies on the markets
if the price goes down, the long forward position will generate a loss of St - 50$, with St being the spot price. Under the same circumstances, the long position in a call option will generate a loss that is limited to the minimum betweek (St - 50$) and options price
selling a call option creates an obligation for the option seller to sell the underlying asset, while buying a put option creates an option to sell the underlying asset for the option buyer
a. gain = ($1.50 - $1.49) * 100,000 = +$1,000 b. loss = ($1.50 - $1.52) * 100,000 = -$2,000
a. gain = ($0.500 - $0.482) * 50,000 = +$900 b. loss = ($0.500 - $0.513) * 50,000 = -$650
I committed myself to the obligation to sell an asset at the price of $40 to the holder of the put. The maximum gain is the price of the option. The mamimum loss is the difference between the strike price and the actual price, minus the price of the option. If the actual price rises without limit, the loss is unlimited too.
On an exchange-traded market, the contracts are standardized and publicly listed, while ont eh OTC market, they can be specific and private. The bid quote is the price at which the market maker is ready to buy an asset The offer quote is the price at which the market maker is ready to sell an asset
Stock based alternative: buy 200 stocks at $29, potential gain or loss is (St - $29) * 200, and loss is limited to $5,800, reached when the stock value is down to $0.
Option based alternative: buy 2,000 options at
I could buy put options with a strike price around $25 and a 4 months maturity
The stock option, as an alternative to issuing stocks, doesn't provide funds, but creates a right for the stock option holder to get stocks under certain conditions.
In hedging, the futures contract will neutralize the risk by allowing the hedger to have a fixed price, instead of a fluctuating one. From the speculator point of view, the futures contract will allow the realization of a price change prediction by betting on it.
The call holder will make a profit if the spot price in March is above $52.50. The option will be exercized if the spot price in march is above $50.00. Diagram is here
The seller of the option will make a profit if the share remains below $64 in June. The option will be exercized if the share price is above $60. Diagram is here