In order to take out a loan, you are required to put up some type of collateral. You decide to offer 1,000 shares of your ZG Corp

In order to take out a loan, you are required to put up some type of collateral. You decide to offer 1,000 shares of your ZG Corp. stock which is valued at $100 per share. You are concerned that the stock price will increase to $125 before you repay the loan and the lender will sell your shares of stock for a profit. How could you manage this risk using a financial derivative?

Expert Solution

I can manage the risk of stock price increasing to $125 before I repay the loan by ensuring to enter into a derivative contract and buying a forward, future or an options derivative contract to protect myself from the value of stock going up and ensure that the profits generated from the difference in the stock price from $100 to $125 is realised by myself. This can happen if I buy a forward, future or options derivative contract wherein I will be insured against the price movements. I will have to pay a premium or some fee to enter into that derivative contract but I will get benefit of the price fluctuation and the price difference will be realised by myself through this derivative contract.

keosha answered 2 years ago

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In order to take out a loan, you are required to put up some type of collateral. You decide to offer 1,000 shares of your ZG Corp

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