etc.). Explain why. 5. Forward or Options? If Tiffany were to hedge the yen-dollar exchange rate risk‚ it can choose either forward contracts or options. Explain how Tiffany can hedge using forward contracts? How to hedge using options? The available forward contracts and options are described in Exhibit 8‚ assuming Tiffany can only use those derivatives to hedge. Based on what you have learned in this course‚ what are the pros and cons of using options to hedge compared to using forward contracts
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MFIN6003 Derivative Securities Dr. Huiyan Qiu End-of-chapter Questions for Practice (with Answers) Following is a list of selected end-of-chapter questions for practice from McDonald’s Derivatives Markets. For students who do not have a copy of the McDonald’s book‚ be aware that a copy of the book is reserved at the main library of the University of Hong Kong for you to borrow for short period of time. Answers provided are for your reference only. It is complied directly from the solution
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of financial options‚ you have been asked to prepare a brief report that firm’s executives can use to gain a cursory understanding of the topic. To begin‚ you gathered some outside materials on the subject and used these materials to draft a list of pertinent questions that need to be answered. In fact‚ one possible approach to the report is to use a question-and-answer format. Now that the questions have been drafted‚ you have to develop the answers. a. What is a financial option? What is the
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Session 3: Case Study Covered Call and Butterfly Strategies B. Butterfly strategy 1. What is the Butterfly strategy? * A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration but three different strike prices to create a range of prices the strategy can profit from. 2. What are its advantages and disadvantages? * Large profit percentage due to low cost involve in executing the position Limited risk
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Options The holder of an option has the right to buy‚ or sell‚ a specified commodity or financial instrument‚ at a predetermined price‚ on a specified date (European-type option)‚ or throughout a specified period (American-type option). A key word in the definition is ‘right’. The buyer‚ or holder‚ of the option has no obligation to exercise the option. Therefore‚ an option allows a risk manager to protect the downside of a risk exposure while at the same time leaving open the opportunity to gain
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PART I. MULTIPLE CHOICE QUESTIONS 1. When the value of the British pound changes from $1.50 to $1.25‚ then the pound has _________ and the dollar has _________. a. appreciated; appreciated b. depreciated; appreciated c. appreciated; depreciated d. depreciated; depreciated 2. When the exchange rate changes from 1.0 euros to the dollar to 0.8 euros to the dollar‚ then the euro has _________ and the dollar has _________. a. appreciated; appreciated
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FINS 3635 - Options‚ Futures‚ and Risk Management Techniques: Mock Final May 28‚ 2012 1) Consider a firm with two classes of zero-coupon debt: senior debt and junior debt. Suppose that the firm’s debt securities both mature at time T1 and the senior ranking debt has a face value of X1 and the junior ranking debt has a face value of X2 . The claims of the senior debt holders are paid first‚ before the claims of the junior debt holders‚ who in turn are paid out their claims before the equity holders
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E4707: Financial Engineering: Continuous-Time Models c 2009 by Martin Haugh Fall 2009 Black-Scholes and the Volatility Surface When we studied discrete-time models we used martingale pricing to derive the Black-Scholes formula for European options. It was clear‚ however‚ that we could also have used a replicating strategy argument to derive the formula. In this part of the course‚ we will use the replicating strategy argument in continuous time to derive the Black-Scholes partial differential
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Problem 20-6 on Call Options Based on Chapter 20 (Excel file included) You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time. a) If the stock is trading at $55 in 3 months‚ what will be the payoff of the call? b) If the stock is trading at $35 in 3 months‚ what will be the payoff of the call? c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration. Short call: value at expiration
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operating cash flows. III. Financing activities have been increasingly important for this firm’s operations‚ at least in the short run. B. II and III only 9. All else the same‚ an ______ style option will be ______ valuable than a ______ style option. A. American‚ more‚ European 10. An American put option gives its holder the right to _________. C. sell the underlying asset at the exercise price on or before the expiration
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