Question
Futures and options can be used to hedge, i.e. investors reduce their risk by avoiding possible loss resulted from changes in prices. (a) Use examples
Futures and options can be used to hedge, i.e. investors reduce their risk by avoiding possible loss resulted from changes in prices.
(a) Use examples to discuss what short hedge and long hedge strategies are using futures. (10 marks)
(b) Use an example to illustrate how to offset in a forward contract. (10 marks)
(c) You buy a call option and a put option for the same underlying asset at the same strike price and at the same time. What will be the payoff diagram for this option strategy? (15 marks)
(d) Discuss why the option strategy in (c) is important under high uncertainty. (15 marks)
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