Re: Questions on Derivatives
Ratan Gupta, FRM
Thanks for posting the questions.
I will try to answer as much as i can.
Q1> Lets say you have bought future contract of nifty @ 5000. You will
get benefited if the price of nifty is more than 5000 but will suffer
loss if it is less than 5000.
Take 2 scenarios : 1st nifty @ 5200 and 2nd nifty @ 4700.
In 1st scenario u will gain 200 and in 2nd scenario u will lose 300.
Now instead of buying future, i buy a call and a put option on nifty
at the excercise price of 5000, assume that there is no premium to be
paid.
Scenario 1: Nifty @ 5200 => Call will be in the money and payoff will
be 200. The put will be out of the money and pay off will be zero.
Total payoff is 200.
Scenario 2: Nifty @ 4700 => Put will be in the money and payoff will
be 300. The call will be out of the money and pay off will be zero.
Total payoff is 300.
Now if you compare the options position and the future positions, the
payoff is the same, that is why u can replicate a futures contract
using 2 options.
Hope this makes sense.
I will not be able to answer questions from Schweser, if you can write
the questions then i will answer.
Thanks
Ratan Gupta, FRM
On Feb 8, 10:20 am, Geetha Vramani <vramani.gee...@gmail.com> wrote:
> Hi Ratan/Abhishek,
>
> Please clarify below questions on derivatives -
>
> -----------------------------------------------------------------------------------------------
> Q1) (From scheweser, pg 159) What does the following mean? -
>
> "It takes 2 options to replicate a future or foward".
> -----------------------------------------------------------------------------------------------
>
> Q2) (From scheweser, pg 173) Problem on currency forward. Are these
> derivatives, always calculated as the difference b/w the 2 rates,
> multiplied with the NP? Do we not use the FRA formula for these?
> -----------------------------------------------------------------------------------------------
>
> Q3) (From scheweser, pg 176) 6the problem - Please elaborate on answer
> C.
> -----------------------------------------------------------------------------------------------
>
> Q4) (From scheweser, pg 177) 13th problem - The question is not clear
> to me, please explain the solution.
> -----------------------------------------------------------------------------------------------
>
> Q5) (From scheweser, pg 183) Margin balance problem - I did not
> understand how to arrive at $250. Please explain.
> -----------------------------------------------------------------------------------------------
>
> Thanks,
> Geetha