Description

Derivatives and its Application
September 2023 Examination

Q1 Mr. X a well-qualified investor is using a combination of different derivative
contracts to improve his portfolio risk-adjusted return. He has created a long position
in a forward contract and Put option on an asset with the same maturity time and a
strike price of the put option contract is equal to the forward price of the asset at the
time the portfolio is set up. Describe the profit from the investor’s portfolio with help of
a suitable diagram. [Use Excel for Diagram] (10 Marks)
Ans :
Introduction:
In today’s dynamic and ever-evolving monetary markets, investors continuously search for
progressive techniques to decorate their portfolio performance and mitigate risks. One such
astute investor, Mr. X, a nicely-qualified character with eager know-how of derivative
contracts, has embarked on a quest to optimize his portfolio’s danger-adjusted returns. Via an
aggregate of different by-product instruments, Mr. X’s objectives are to leverage his
economic acumen and capitalize on market opportunities.
This assignment delves into the resourceful approach followed by Mr. X, wherein he has
ingeniously crafted a portfolio using an extended role in a forward contract and a put option
It is only half solved
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Q2. An investor would like to speculate on a rise in the price of a certain stock. The
current stock price is $29, and a three-month call with a strike of $30 costs $2.90. You
have $5,800 to invest. Identify two alternative applications of derivatives, one involving
an investment in the stock and the other involving an investment in the option. What
are the potential gains and losses from each? (10 Marks)
Ans :
Introduction
Derivatives are financial devices whose value is derived from the underlying property. They
play an essential role in economic markets, allowing traders to hedge chance, speculate on
price moves, and decorate overall portfolio performance. Regular derivatives programs are
investing in the inventory immediately and investing in options. In this paper, we can
discover these programs within the context of an investor speculating on an upward thrust

3. Suppose that put options on a stock with strike prices $30 and $35 cost $4 and $7,
respectively. How can the options be used to create.

a) Construct a table that shows the profit and payoff for a bull spread and (5 marks)
Ans ;
To construct the essay:
1. Introduction:
A bull spread is a buying and selling approach that includes the simultaneous purchase and
sale of two options at the identical underlying stock with exclusive strike fees but the same
expiration date. This approach is typically used when investors expect the underlying
inventory charge to increase moderately. The two options worried in a bull spread are the

b) Construct a table that shows the profit and payoff for a bear spread? (5 Marks)
Ans ;
Bear Spread Options Strategy: Maximizing Profit in a Bearish Market
Introduction
Market situations. One such method is the undergo unfold. A popular alternative strategy
buyers utilize to capitalize on bearish market moves. In this paper, we can delve into the
concept and alertness of the undergo spread alternatives approach and show how it may
generate income in a declining inventory marketplace.