Answered: a) If you must buy some asset in future…

a) If you must buy some asset in future and you just want to hedge the risk what sort of derivative trading will you do? Explain in brief with payoff diagram.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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If you have long position in one asset and you want to hedge the risk of price drop in that asset while still having the upside in case the asset price goes up, what sort of derivative trading will you do? Explain in brief with payoff diagram.
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At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? 1. I. Asset's standard deviation 2. II. Asset's beta 3. III. Risk-free rate of return 4. IV. Market risk premium I, III, and IV only I, II, III, and IV I and III only II and IV only III and IV only ооо O
If investors speculate in derivative contracts rather than in the underlying asset, they will probably achieve returns, and they are exposed to relatively _ risk. lower; lower lower; higher higher; lower higher; higher
My question is for a synthetic call option why do we need to borrow the present value of the strike price and what does it mean in a simple language explanation. Similarly why do we need to lend the present value of the stock at risk-free rate and what does it mean in simple language explanation? Please also clarify the significance of risk free rate? Why is it used in put call parity. Synthetic Call Option: If an investor believes that a call option is over-priced, then he/she can sell the call on the market and replicate a synthetic call. Borrow the present value of the strike price at the risk free rate and purchase the underlying stock and a put. Synthetic Put Option: Similar to the synthetic call option. A synthetic put can be created by re-arranging the put-call parity relationship, if the trader believes the put is overvalued. Synthetic Stock: A synthetic stock can also be created by rearranging the put-call parity identity. In this case, the investor will buy the…
When you have a fixed investment horizon, it is important to maximize your earnings. You must understand the risks and returns of the security and the risk factors that can affect the price of the bond. If an investor has a fixed investment horizon, what type of security can be used to minimize both the price risk and the reinvestment risk? Does this security protect the real payoff? Explain.
Suppose that C is the price of a European call option to purchase a security whose present price is S.Show that if C > S then there is an opportunity for arbitrage (i.e. riskless profit). You may assume theinterest rate is r = 0 so that present value calculations are unnecessary.
Investors choose derivatives to invest directly in the asset. to reduce risk by hedging against losses. to take on additional risk by speculating. both to reduce risk by hedging against losses and to take on additional risk by speculating.
65) Mike Piazza is asking you to tell him about the Capital Asset Pricing Model (CAPM). What will you tell him? a) CAPM shows the expected return for a particular asset b) CAPM incorporates the pure time value of money c) CAPM explains the reward for bearing systematic risk d) CAPM alerts you to the amount of systematic risk of a particular security e) All of the above
What type of security can be used to minimize both price risk and reinvestment riskfor an investor with a fixed investment horizon? Does this security protect the realpayoff? Explain.
Exploring Finance: The Security Market Line and Risk Premium Changes Security Market Line: Risk Premium Changes Conceptual Overview: Explore how risk premium changes affect the security market line. The Security Market Line defines the required rate of return for a security to be worth buying or holding. The line, depicted in blue in the graph, is the sum of the risk-free return (rf in the slider) and a risk premium determined by the market-risk premium (RPM) multiplied by the security's beta coefficient for risk. Drag the slider below the graph to change the relationship between a security's beta coefficient and the amount of the market risk premium. Drag left or right on the graph to move the cursor to evaluate securities with different beta coefficients. In this graph, the risk-free return is fixed at 6%. r = r_{RF} + RP_M * beta = 6\% + 5\% * 1 = 6\% + 5.00\% = 11.00\%r=rRF+RPM∗beta=6%+5%∗1=6%+5.00%=11.00% 1. If the market-risk premium were 4% and a security's beta…
If you introduce a risk free asset in your portfolio of risky assets; how will this change the shape of the opportunity? What are the main implications with respect to portfolio theory?

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