three questions about Derivatives

three questions about Derivatives

1.Explain call and put options. Show your own examples about how to calculate their payoff (Long

call, short call, long put, and short put).

2. Show your own example about daily marking-to-market of futures contract. Include a margin

call.

3. Show your own example about a plain vanilla interest rate swap using fixed and floating rates

(Libor).

Solution Preview

Derivatives

1. A put option occurs when an individual buys a particular security when he or she perceives that the price of an inventory or index is going to reduce in the near future. For instance, particular traders can decide to buy securities of stock thinking that the prices of stock will definitely reduce. In addition to that, the put option is the willingness to sell 100 shares of a stock at a particular price and by a certain date. Hence, the certain date is usually referred to as striking price.

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