Question

1. If you have an option on a stock, how do you measure the price sensitivity of the option premium to the price of the stock? Would that sensitivity be positive or negative? Explain

b. Briefly, enumerate the steps in a proper risk management process?

c. What would you do if you buy a futures contract on oil and before two months from expiration, your expectations become opposite to those when you originally bought the futures contract?

d. From an academic (and logical as well as practical) point of view, you cannot buy an asset on spot and, at the same time, selling it with a futures contract and make a sizable profit. Why this statement is true?

Answer 1

Answer-1:- An option's price can be influenced by a number of factors that can either help or hurt traders depending on the type of positions theyhave taken. Succcessful traders understand the factors that influence option pricing, which include the so called "Greaks" a set of risk measures so named after the Greek letters that denote them, which indicatehow sensitive an option is to time value decay, changes in implied volatility, and movements in the price its underlying security.

options are contracts that give option buyers the right tobuy or sell a security at a predetermined price on or before aspecified day. The price of an option, called the premium, is composed of a number of variables. Options traders ned to be aware of these variables so they can make an informed decision about when to trade an option.

When investors buy options, the biggest driver of outcomes is the price movement of the underlying security or stock.How much an option's premium, or market value, fluctuates leading up to its expiration is called volatility.

Volatility:- Price fluctuations can be caused by any number of factors, including the financial conditions of the company, economic conditions, geopolitical risks, and moves in the overall markets. Implied volatility represents the market's view of the likelihood that an asset's price will change. Investors use implied volatility, called implied vol, toforecast or anticipate future moves in the security or stock and in theopion's price. If volatility is expected to increase, meaning impllied volatility is rising, the premium for an option will likely increase as well.

exmple:- the investor pay the $5 premium upfornt and owns a call option, with which it can be exercised to buy the stock at the $45 strike price. The option isn't going to be exercised until it's profitable or inthe money. We can figure out how much we need the stock tomove in order to profit by adding the price of the premium to the strike price. $5+$45=$50

____________________________________________________________________________________________Answer 2:-What is Risk management:-

Risk management is the process of identifyingm analyzing and responding torisk factors throughout the life of a project and in the nest interests of its objective. Proper risk management implies control of possible future events and is proactive rather than reactive.

Proper risk management will reduce not only the likelihood of an event occurring, but also the magnitude of its impact. I was working on the installation of an interactive voice response systeminto a large telecommunications company. Thecoding department refused to estimate a total duration estimation for their portion of the project work of ess than weeks. My approach to task duration estimation is that the lowest levesl task on a project whose total duration is 3 months or more should be no more than 5 days. so this 3 week duration estimation was ouotside my boundries. Neverthless, the project team accepted it. No risk assessment was conducted todetermine what might go wrong.Unfortunately, this prevented their ability tosuccessfully comolete their tasks on time.

Types of Risk:-

1. Market risk:- This is the risk of the financial market performing differently to how you expect and is the most common risk in business, for example, if you believe the US dollar will increase against the Euro and you, therefore, decide tobuy the EURUSD currency pair, only for it to fall, you will lose money.
2. Leverage Risk:- Most traders use leverage to open trades that are much larger than the size of the deposit in their trading account. In some cases this can possible lead to losing more money than was initially deposited in the account.
3. Interest Rate Risk:- An economy's interest rate can have a impact on thevalue of that economy's currency, which means traders can be at risk of interest rate changes.

Tips of Risk managment:-

1. Identify the Risk:-you and your team uncover, recognise,desirable risk that might affected your project or its out come. there are number of tecnique you can use to find project risk.during this step by step to prepare project risk register.
2. Analyze the risk:- once risk are identified you determine the likelihood and consequece of each risk. You develop an understanding of the nature of the risk and its potential to affect project goals and objectives. This information is also input to your project Risk register
3. Evaluate or Rank the risk:-You evaluate or rank the riks by determining the risk magnitude, which is the comnination of likelihood and consequence. You make decsions abouut whether the risk is acceptable or whether it is serious enough to warrant treatment. These risk ranking are also added to your project risk register
4. Monitor and review the risk:- This is the step wher you take your project risk register and use it to monitor, track and review risks. Risk is anout uncertainty. If you put a framework around that uncertainty, then you effectively de risk your project. and that means you can move muchh mre confidently toacheive your project goals.

____________________________________________________________________________________________Answer:3 future contract

A future cotract is a legal agreement tobuy or sell a particular commodity asset, or security at a predeteremined price at a specified time in the future. Future contracts are standardized for quality and quantity to facilitate trading on a future exchange. The buyer of a future contract is taking o the obligation to buy and receive theunderlying asset when the futures contract exprires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date.contracts are negotiated at futrees exchage which act as a marketplace between buyers and sellers. the buyer of a contract is said to be the long position holder, and the selling party is said to be the short position holder. As both parties risk their counter party walking away if the price goes against them, the contract may involve both parties lodging a margin of the value of the contract with a mutually trusted third party. For example, in gold futures trading the margin varies between 2% and 20% depending on the volatility of the spot market.

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Answer-4:-Buyin and selling futures contract is essentially the asme as buying or selling a numher of units of a stock fromm the cash market, but without taking immediate delivery.

In case of indecx futures too, the index's level moves up or dwon replicating the movement of a stock price. So you can actually trade in index and stock contracts in just the same way as you would trade in shares

when you trade in future contracts, you do not give or take immediate delivery of the assets concerned. This is called settling of the contract. this usually happens on the date of the contract's expiry. however many traders also choose to settle before the expiry of the contract.

when you open a buy position, you are essentially uying an assest form the market And when you close you position you sell it back to the marekt buyers also known as bull beleive an asset's value is likely to rises sellers or bears generaly think its value is set to fall. when you opoen a position with a broker or trading provider,, you will be presented with two prices. If you want t o trade at the buy price,which is slightly above the market price. you open a long position.