Question

(a) Critically analyse the potential benefits of investing in options.

(b) Compare and contrast the risks of investing in futures compared to traditional investments such as shares and bonds.

Answer 1

A. Potential benefit of investing into options are as follows-

I. Options will only provide with the right to buy or sell and it is not an obligation so options are not obligatory nature.

B. options will be having higher volatility and options are time bound so they will be helpful in having short term investing in a proper manner.

C. investing are generally having lower transaction cost and they will be cheaper to exercise.

D. These are embedded features and they will be helping in exercising as per the will of the investors if the options are exercisable and can be helpful multipurpose dimensions.

E. Options can be used for hedging the portfolio and it will be helping in protecting the the unexpected suddeness of the market.

F. Options can be used for speculations through various categories like out of the money options as well as in the money options and at the money options so they will be helpful for predicting the price of the shares for future time periods also.

2. Risk of investment into futures rather than traditional investment like stock and bonds are as follows-

A. Futures are time bound and they will have to be exercised within the time period

B. The cost of undertaking exposure in futures are higher.

C. They are not representative of the underlying security but they will be generally deriving their value so their derivatives and not the underlying security

D.one cannot invest into futures for a longer period of time period because they will have to be rolled over and the cost will be very high.