Question

Investment Open Questions:

1. Propose a trading strategy, describe the procedures to implement the strategy, ways to measure the performance, and methods to measure the risk.
2. How to use derivatives (options, futures, swaps, etc.) to manage the risk?

Answer 1

Solution:

I)

Trading Strategy: Protective Put

Procedure: Buy the stock and buy the put option. Suppose the share price is X and you buy 100 quantity then buy 100 quantity of the put option of the stock.

Measure the performance: Performance can be measured using the Return on investment calculation. ROI = Return / investment *100

Method to measure risk: Risk is the maximum amount that can be lost in this trading. In this strategy, the loss will be limited

II) An option can be used to manage risk. In the protective put strategy, we can buy the put to limit the risk.

This can be explained by the graph below

Put option payoff = MAX( Strike price- spot price,0)

Maximum loss in the strategy is 10