PowerPoint Presentation
Q1
Hedging Speculation Arbitrage
Purpose To minimize risks; a position in derivatives can be used to offset the exposure To increase profits, no position to offset, a bet on future price movements, short-term risky strategy betting on market inefficiencies, taking positions in different markets to ‘lock in profit’, risk is limited
Example Hedging a long position with a short futures contract
Buying a security with a hope that the price will go up Buying an undervalued asset
Riskiness Minimal Very risky Limited
When first issued, a stock provides funds for a company. Is the same true for a stock option?
An exchange-traded stock option provides no funds for the company. It is a security sold by one investor to another. The company is not involved.
By contrast, a stock when it is first issued is sold by the company to investors and does provide funds for the company.
Q3
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