Investing With Derivative Securities

Investing With Derivative Securities - Investing With...

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Unformatted text preview: Investing With Derivative Securities • Key Difference between Forward and Option – Call option • • – Requires up front payment Allows but does not require future settlement payment Forward contract • Does not require front-end payment • Requires future settlement payment 20-1 Investing With Derivative Securities • Basic Payoff and Profit Diagrams for Forward Contracts – – – The payoffs to both long and short positions in the forward contract are symmetric, or two-sided, around the contract price The payoffs to the short and long positions are mirror images of each other; in market jargon, forward contracts are zero-sum games See Exhibit 20.10 20-2 Exhibit 20.10 20-3 Investing With Derivative Securities • Basic Payoff and Profit Diagrams for Option Contracts – – – The investor receives expiration date payoffs that are asymmetric, or one-sided. For instance, a call option buyer has unlimited upside potential with limited downside risk The difference between payoff and profit is the option premium (cost), a sunk cost The payoffs and profits for option 4 20- buyers ...
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Investing With Derivative Securities - Investing With...

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