FREE Trial

a. Suppose you enter into a short 6-month forward position at a forward price of $50. What

Question:

a. Suppose you enter into a short 6-month forward position at a forward price of $50. What is the payoff in 6 months for prices of $40, $45, $50, $55, and $60?

b. Suppose you buy a 6-month put option with a strike price of $50. What is the payoff in 6 months at the same prices for the underlying asset?

c. Evaluating the payoffs of parts (a) and (b), which contract should be more expensive (i.e., the long put or short forward)? Why?

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Answer rating: 62% (16 reviews)

a The payoff to a short forward at expiration is equal to Payoff to short forward forward price spot ...View the full answer


answer-question-section
Answered By
tutor-profile-image
Raunak Agarwal
Teaching is my hobby and now my profession. I teach students of CA and CFA(USA) in batches of 100 students and have a 5 year experience.
5.00+ 1+ Reviews 10+ Question Solved
Related Book For  book-img-for-question
Derivatives Markets

Derivatives Markets

ISBN: 9789332536746

3rd Edition

Authors: Robert McDonald

See More Books
Question Posted:
See More Questions

Related Video

A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

Students also viewed these Corporate Finance questions

New Questions And Answers About The Beginning Of The Universe Intrrguing Information From Ancient Writings Prompt Disscussions 1st Edition - ISBN: B0B3S1VVXV - Free Book