3sl - THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND...

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1 THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND ECONOMICS FINA0301CDE - DERIVATIVES First Semester, 2009-2010 Tutorial 2 Slide Chapter 3 – Insurance, Collars, and Other Strategies c Basic Insurance Strategies Buying Insurance 1) Insuring a Long Position: Floors A put option is combined with a long position in the underlying asset Long S&R Index Long S&R Put Payoff Payoff 0 0
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FINA0301 – Tutorial 2 Slide Mr. Clive Man Chung HO 2 Combined Payoff of Long Index and Put Combined Profit Payoff Profit Payoff Buy a call + invest in Zero-Coupon Bonds Profit Long Call The cash flows in purchasing a call are different from the cash flows in buying an asset and insuring it, but the profit for the two positions is the same. 0 0
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FINA0301 – Tutorial 2 Slide Mr. Clive Man Chung HO 3 2) Insuring a Short Position: Caps A call option is combined with a short position in the underlying asset Short S&R Index Long S&R Call Payoff Payoff Combined Payoff of Short Index and Long Call Combined Profit Payoff Profit Payoff Long put + Borrow money Profit Long Put 0 0 0 0
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FINA0301 – Tutorial 2 Slide Mr. Clive Man Chung HO 4 Selling Insurance
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This note was uploaded on 01/26/2010 for the course FINA 2802 taught by Professor Xia during the Fall '09 term at HKU.

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3sl - THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND...

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