APPLICATION OF OPTIONS
PRICING OPTIONS An option buyer has the right but not the obligation to exercise on the seller. The worst that can happen to a buyer is the loss of the premium paid by him. His downside is limited to this…
Category Futures & Options
Option Premium Profile
PAYOFF PROFILE FOR BUYER OF CALL OPTIONS: LONG CALL A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option. The profit/loss that the buyer makes on the option depends…
Option Premium
OPTIONS PAYOFFS The optionality characteristic of options results in a nonlinear payoff for options. In simple words, it means that the losses for the buyer of an option are limited, however the profits are potentially unlimited. For a writer, the…
Future Trading
ARBITRAGE: UNDER-PRICED FUTURES. BUY FUTURES. SELL SPDT Whenever the futures price deviates substantially from its fair value, arbitrage opportunities arise. It could be the case that you notice the futures on a security you hold seem under-priced. How can you…
Bearish Security
SPECULATION, BEARISH SECURITY, SELL FUTURES Stock futures can be used by a speculator who believes that a particular security is over valued and is likely to see a fall in price. How can he trade based on his opinion ?…
Bullish Security
SPECULATION. BULLISH SECURITY. BUY FUTURES Take the case of a speculator who has a view on the direction of the market. He would like to trade based on this view. He believes that a particular security that trades at Rs.…
Effective Risk Management
PRICING FUTURES Pricing of futures contract is very simple. Using the cost of carry logic, we calculate fhe fair value of a futures contract. Every time the the observed price deviates from the fair value, arbitragers would enter into trades…
Nifty Future
FUTURE PAYOFFS Futures contracts have linear payoffs. In simple words, it means that the losses as well as profits for the buyer and the seller of futures contract are unlimited. These linear payoffs are fascinating as they can be combined with…
Single Stock Futures
APPLICATIONS OF FUTURES AND OPTIONS The phenomenal growth of financial derivatives across the world is attributed the fulfilment of needs of hedgers, speculators and arbitraguers by these products. In this chapter we first look at how trading futures differs from trading the…
Stock market Questions And Answers
QUESTIONS AND ANSWERS ON CHAPTER Q. Which of the following cannot be an underlying asset for financial derivative contract ? Equity Index Commodities 3.Interestrat£ 4.. Foreign Exchange A. The correct answer is NO.2. • Q. In an option contract, the…