Cost whereas buying an options position does require

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cost whereas buying an options position does require the payment of a premium.Compared to the absence of upfront costs of futures, the option premium can be seenas the fee paid for the privilege of not being obligated to buy the underlying in theevent of an adverse shift in prices. The premium is the maximum that a purchaser ofan option can lose.Another key difference between options and futures is the size of the underlyingposition. Generally, the underlying position is much larger for futures contracts, andthe obligation to buy or sell this certain amount at a given price makes futures morerisky for the inexperienced investor.The final major difference between thesetwofinancial instrumentsis the way the gains are received by the parties. The gain ona option can be realized in the following three ways:exercisingthe option when it isdeepin the money, going to the market and taking the opposite position, or waitinguntil expiry and collecting the difference between the asset price and thestrike price.In contrast, gains on futures positions are automatically 'marked to market' daily,meaning the change in the value of the positions is attributed to the futures accountsof the parties at the end of every trading day - but a futures contract holder can realizegains also by going to the market and taking the opposite position.Writer is required to have a margin account (because losses are unlimited),buyer’s losses are only unlimited to the premium paid (so no margin accountrequired)2.Given that the volatility is expected to rise in the future, the trader should buy the
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Chapter 5 / Exercise 26
International Financial Management
Madura
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International Financial Management
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Chapter 5 / Exercise 26
International Financial Management
Madura
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