Derivatives Class #3-1 - Derivatives Markets Class # 3...

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Unformatted text preview: Derivatives Markets Class # 3 Collars A collar represents a bet that the price of the underlying asset will decrease and resembles a short forward A zero-cost collar can be created when the premiums of the call and put exactly offset one another 3-2 Speculating on Volatility Options can be used to create positions that a nondirectional with respect to the underlying asset Examples Straddles Strangles Butterfly spreads Who would use nondirectional positions? Investors who do not care whether the stock goes up or down, but only how much it moves, i.e., who speculate on volatility . 3-3 Straddles Buying a call and a put with the same strike price and time to expiration A straddle is a bet that volatility will be high relative to the markets assessment . 3-4 Strangles Buying an out-of-the-money call and put with the same time to expiration A strangle can be used to reduce the high premium cost, associated with a straddle 3-5 Written Straddles Selling a call and put with the same strike price and time to maturity Unlike a purchased straddle, a written straddle is a bet that volatility will be low relative to the markets assessment 3-6 Butterfly Spreads Write a straddle + add a strangle = insured written straddle A butterfly spread insures against large losses on a straddle 3-7 Asymmetric Butterfly Spreads 3-8 Summary of Various Strategies Different positions, same outcome Strategies driven by the view of the markets direction 3-9 3-10 Chapter 4 Introduction to Risk Management Basic Risk Management Firms convert inputs into goods and services output input commodity producer buyer A firm is profitable if the cost of what it produces exceeds the cost of its inputs A firm that actively uses derivatives and other techniques to alter its risk and protect its profitability is engaging in risk management 4-12 The Producers Perspective...
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Derivatives Class #3-1 - Derivatives Markets Class # 3...

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