Question

In: Finance

On your own version, explain the motivations behind options hedging.

On your own version, explain the motivations behind options hedging. Expand your explanation through various types of options hedging strategies that are available to reduce options hedging costs while able to maximize profit. (limit your answer to be within 500 words)

Solutions

Expert Solution

Option hedging is done produced a risk associated with option buying or selling. Options are very volatile securities, hence to reduce the volatility of the instrument option is brought and sold at the same time at different strike prices or same strike price with a calendar Spread.

The expiration of the buy and sell position can be the same expiry or a calendar expiry.

The motivation is the limit the risk associated with options trading, it in turn also reduces the return.

Various option trading strategies used for hedging are:

1. Iron Condor:

Here call option is brought and sold +

A put option is brought and sold.

2. Butterfly:

In this strategy: 2 call options a brought at different strike prices in both sides and 2 call options are sold at the centre.

The strategies are available to reduce option hedging cost by reducing the span margin and are able to maximise profits.

Option hedging is mainly required and recommended, while option selling.


Related Solutions

Explain the motivations behind options hedging. Expand your explanation through various types of options hedging strategies...
Explain the motivations behind options hedging. Expand your explanation through various types of options hedging strategies that are available to reduce options hedging costs while able to maximize profit. (limit your answer to be within 500 words)
What were the motivations behind the merger that led to the creation of NFL (one of...
What were the motivations behind the merger that led to the creation of NFL (one of the most popular sports league in North America)? What made this merger successful?
In your own words, explain the critical differences between the forward, the futures, and the options...
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?
(i) Briefly explain the concepts of Gamma hedging and Gamma trading in options trading. (ii) For...
(i) Briefly explain the concepts of Gamma hedging and Gamma trading in options trading. (ii) For European options, what is the relationship between the interest rate sensitivity of the call delta to that of the put delta?
One of the basic motivations behind the Minimum Spanning Tree Problem is the goal of designing...
One of the basic motivations behind the Minimum Spanning Tree Problem is the goal of designing a spanning network for a set of nodes with minimum total cost. Here we explore another type of objective: designing a spanning network for which the most expensive edge is as cheap as possible. Specifically, let G = (V, E) be a connected graph with n vertices, m edges, and positive edges costs that are all distinct. Let T = (V, E0 ) be...
1. Using real wold examples, explain the motives behind government intervention in trade. In your own...
1. Using real wold examples, explain the motives behind government intervention in trade. In your own opinion, are these motives good for international business? 2. Tariffs are meant to protect domestic producers. Are there examples of instances when tariffs may have failed to meet their objectives?
Write your own version of a class template that will create a static stack of any...
Write your own version of a class template that will create a static stack of any data type. Demonstrate the class with a driver program. please make a version to copy.
What theory of motivations makes the most sense for you? Explain your answer based on your...
What theory of motivations makes the most sense for you? Explain your answer based on your attempt to get through college, write at least 250 words.
Explain in your own words the tax policy reason behind section 118-195 Income tax Assessment Act...
Explain in your own words the tax policy reason behind section 118-195 Income tax Assessment Act 1997 with respect to deceased estates. In so doing discuss why the commissioner has been given the discretion to extend the two year period . Your answer must be supported by reference to legislation case law and tax rulings if any... note: Australian taxation law
Recreate the above table in your own version of excel. At a rate of 4.5%p.a compounding...
Recreate the above table in your own version of excel. At a rate of 4.5%p.a compounding monthly, to repay the loan you see that 51 full repayments of $9,000 are required in addition to a smaller final repayment. If the interest rate is changed to 14.9% p.a. compounding monthly, how many full repayments of $9,000 will be required to repay the loan? (answer by rounding down to whole numbers to reflect full repayments eg 51)
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT