Financial Markets (Bilingual Teaching)
compared to the exercise price, the higher the premium for a put option
? Better chance of price depreciation well below strike price if the price of the underlying asset is already close to or below the exercise price
2) Volatility and maturity issues the same as for call options 6. Hedging with Stock Options
1) Investor hedge against possible adverse stock price
movements
2) Downside price insurance for stock investor
? Investor can sell/write a call or buy a put if concerned about a temporary decline in a stock price
? Writer/seller gains premium income from ―covered‖ option to offset possible stock losses in exchange for giving up possible upside profit
? Buying a put trades premium for downside floor on stock portfolio
7. Stock Index Options (Cf: Stock Index Futures)
Right to trade a specified stock index at a specified price by a specified expiration date 8. Options on Futures Contracts 1) Background:
第 5 页 共 42 页
Financial Markets (Bilingual Teaching)
? Options on futures allow the right but not the obligation to purchase or sell a particular futures contract for a specified price and for a specified period of time 2) Speculating with options on futures if an interest rate
decline is anticipated
? Purchase a call option on Treasury bond futures
? If expectations are correct, T-bond prices and futures contract increase as interest rate levels decrease
? Exercise the option to purchase futures at the strike price which is lower than the value of the futures contract ? Selling futures offsets futures position at a profit ? If rates rise, do not exercise option on futures; Loss is reduced using the options on futures strategy as compared to a futures only speculative position 3) Hedging with Options on Futures
? A portfolio manager wishes to hedge the downside risk(one-way insurance) of a stock portfolio while allowing for the upside potential
? Buy put options on futures to hedge a possible temporary decline in the market
? Can sell call options to cover the cost of buying put options
第 6 页 共 42 页