# Lecture 18 - Futures and Options Bill Lesser AEM FUTURES...

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Futures and Options Bill Lesser AEM

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2 FUTURES AND OPTIONS Component of corporate finance Institutional mechanism for controlling (particularly) price risks Also provides opportunities for speculative gain F&O are forms of derivatives
3 Specialized Subject - Real Alphabet Soup of Terms hedging margins basis intrinsic value deltas backwardation “law of one price” “put-call parity theorem” calls covered vs. naked puts strike price settle price optimal hedging ratio arbitrage

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4 What Are Futures? (Contract to buy or sell a specified product at a future date) MOTIVATE Alicia is planning to spend the spring semester in  Munich with Study Abroad. She and her parents have arranged the funding, but it  is tight and there are no funds for the all-important  European tour. Then her grandparents generously offer  her \$10,000. Problem is: Alicia is panicky that the exchange rate  will decline and she will  lose some of the money.
5   Exchange Rate: .687  Euros/\$  1.455  \$/Euro What happens if rises to .604 Euro/\$  (1.655 \$/Euro) by 5/1/10 when Alicia  will begin traveling? Today: \$10,000 x .687 = Euro 6,870 May 1:   \$10,000 x .604 =Euro 6,040 “Loss” of 830 Euros (\$1,208 12%)

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What to do? Can lend Euros today to be repaid May 1 Steps : 1. Convert \$ to Euros 2. Deposit in Euro bank savings account 3. Withdraw on May 1 Deposit Euros 6,870 (less conversion costs)
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## This note was uploaded on 08/28/2009 for the course AEM 3350 taught by Professor Lesser,w. during the Spring '08 term at Cornell University (Engineering School).

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Lecture 18 - Futures and Options Bill Lesser AEM FUTURES...

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