Review Questions
1
.
What is the difference between someone using a derivative security to hedge risk and someone using a derivative security to speculate?
2
.
Explain how vertical integration may be used as a method of hedging against commodity price risk.
3
.
What is the difference between a forward contract and a futures contract?
4
.
You are considering purchasing a call option to purchase Mexican pesos in three months with a strike price of MXN 20/USD. The premium for this call option is MXN 2. Show the payoff you will receive at various prices in a diagram.
5
.
You are considering writing a call option to purchase Mexican pesos in three months with a strike price of MXN 20/USD. The premium for this call option is MXN 2. Show the payoff you will receive at various prices in a diagram.
6
.
Why are options considered to be a “zero-sum game”?