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ex
D
C Options on
ded funds B A ETFs and
Stock
put
options Indexes
D Exchange-
C Options on
B traded funds A
ETFs and
Stock
ut
ions Indexes
d
d
D Exchange-
C Stock index options
traded funds B
y A
M
L
K
If the speculators expect a decline J
in interest rates, they may consider
purchasing a call option on Treasury
bond futures.
Example
Kelly Warden expects interest rates to decline and
purchases a call option on Treasury bond futures
94 .50% of $100,000. or $94,500. The call option is M
L
purchased at a premium of 2% of $ 100,000,which is
equals to $2,000. Assume that the interest rates do K
decline and, as a result , the price of the Treasury bond J
future contract rises overtime to a value of $99,000
shortly before the option’s expiration date. At this time,,
Kelly decided to exercise the option and closes out the
position by selling an identical future contracts at a
higher price at which she purchased the futures.
Q
P
Selling price of T-bond future
Q
Less Purchase price of T-bond
futures
add Call option premium recieved P
= Net loss to seller of call Option O
of Futures N
Y
stocks over a long-term period. However, you
are concerned that the stock market may
X experience a temporary decline over the next
W three months and that your stock portfolio will
probably decline by about same degree as the
market. You want to create a hedge so that your
V
portfolio will decline no more than 3% from its
present value, but you would like to maintain
any upside potential. You can purchase a put
option on index futures to hedge your stock
portfolio. Put options on S&P 500 index futures
are available with expiration date about 3
months now.
Assume that the S&P index level is currently 1600
and that one particular put options on index
futures has a strike price of 1552 (3% less than
Y prevailing index level) and a premium of 10.
X
W Since the options on S&P 500 index futures are
V
priced at $250 times the quoted premium, the
dollar amount to be paid for this option is
10 x $250= $2,500
Y
X
When using put W
options to hedge,
V
various strike prices
exist for a option on a
specific stock index
for a specific
Selling Call Options to Cover The
Cost of Put Options.
payment = $8,000
Option as
3 Executive
2 Compensation
1
Z
Many firms distribute stock option s to
executives and other managers as a
reward for good performance.
Limitation of Option
Compensation
3 Many option compensation programs do
2 not account for general market
1
conditions..
Z
Executives with substantial options may
be tempted to manipulate the stock ‘s
price upward in the short term, even
though doing so adversely affects the
stock price in the long-term.
3
Globalization 2
1
of Option Z
Markets
Currency Options
Contracts
3
2
1
Z
Currency call options