Differences between the features and cost of forward contracts
and options?
Differences between the features and cost of forward contracts
and options?
Solutions
Expert Solution
Forwards and options are both derivate contracts and are used
for hedging, specuplation and arbitrage purposes.I have enlisted
thier differences in the image file below.
Forward contracts and futures contracts have similar functions
and different features. Among those features are the fact that
while forward contracts are closed out by specific performance,
futures contracts are almost never closed out that way. Why not?
Since the contracts are closed out in different ways, it is implied
that the parties to these contracts have different goals. What
types of entities get involved in each? How might their goals
differ?
What are the advantages and disadvantages of using options
contracts relative to forward contracts to hedge against
transaction exposure? Which contract would you use for committed
transactions? How about for anticipated transaction? Explain your
answer.
Suppose there are call options and forward contracts available
on coal, but no put options. Show how a financial engineer could
synthesize a put option using the available contracts. What does
your answer tell you about the general relationship among puts,
calls and forwards?
Suppose there are call options and forward contracts available
on coal, but no put options. Show how a financial engineer could
synthesize a put option using the available contracts. What does
your answer tell you about the general relationship among puts,
calls and forwards?
Suppose there are call options and forward contracts available
on coal, but no put options. Show how a financial engineer could
synthesize a put option using the available contracts. What does
your answer tell you about the general relationship among puts,
calls and forwards?
In your own words, explain the critical differences between the
forward, the futures, and the options markets. What advantages does
a futures market offer that is not available in a forward market?
What advantages does a forward market offer that is not available
in a futures market? What advantages does an options market offer
over a forward or a futures market?
(a) Briefly outline two differences between
futures and options contracts.
(b) In August, a wheat farmer decided to hedge
her entire anticipated 1,000 tonne wheat harvest with January wheat
futures that were trading at a price of $290 per tonne.
In January, the farmer harvested 1,000 tonne of wheat and sold
this wheat at auction for $270 per tonne. She then closed out her
January wheat futures contracts for $272 per tonne.
From this information and using a standard wheat...