Question

Chief executive officer (CEO) Marjorie Kesich has requested that you create a PowerPoint presentation detailing the differences between using futures contracts and options contracts to reduce risk. She wants to know if there are any advantages to using one of the instruments over the other. Discuss the following:

• Is one of these more effective than the other?
• Are the costs of each different?
• Calculate how many call options contracts would be needed if you were trying to hedge a portfolio of 200 shares of stock.

The answers to these questions will have an effect on the bottom line of the firm. Make sure to provide concrete explanations of each, and create examples where it would be more appropriate to utilize an options contract over a futures contract and vice versa. Your presentation should be between 8–10 slides.

Answer 1

A Futures contract is a standardized legal agreement to buy or sell at a predetermined price at a specified time in the future.IT is between parties which are unknown to each other.
An option is a contract which gives the investor the rightn to buy or sell an underlying asset or instrument at a specified strike price . Its a right but not an obligation.
Investor could go for these contracts to hedge the risk.price of both differs as in option investor has to pay the premium but there is no such premium in future contracts.

To hedge the portfolio first you have to calculate greeks i.e delta,vega,thetha,gamma,etc..It depends on what basis you want to hedge the portfolio on the basis of volatility,time,underlying asset. Most famous greek is delta which is on the basis of price if underlying asset.
multiply delta with portfolio amount(200 shares* price). It will give you the amount of share in which you have to take oppsite position to hedge completely.