Question

Options - are contracts that give the holder the right, not the obligation, to buy or sell the underlining asset at a specific price and time. How are options used to protect holdings of corporations investments? Also, how are they used for investors in corporations? Provide a real example example along with an advantage and disadvantage and your opinion of options as they pertain to an MNC.

** short and to the point please :)

Answer 1

Options are of two type call give buying right while put use to give selling right. suppose a corporation has some holdings whose price are volatile & chances are there that in future it will move down to insur this loss whatever asset corporation is holding buy the equal number of put option of that underlying asset. While doing so your maximum loss is up to premium amount only if in future price of that underlying asset is going down you can execute your option right & compensate your loss & if it will go up then your maximum loss is premium amount only . in this way one can hedge any holding by buying selling equal amount of call & put option.

if any corporation is dealing in export import business then they may face uncertainties in their future cash flows to compensate it & they can take the opposite position in option market to ensur from future volatility of exchange market. in this way they can hedge their holdings.

example suppose a pharmaceutical company has 10 kg holding of siver whose current price is $472.62 / kg then to protect it from down fall he need to buy equal amount of put of silver in commodity market & on expiry of contract he need to buy further put of same quantoty of silver till the time he need to hedge it for this he need to pay premium amount.