Question

1. Explain the basic characteristics of options markets and individual options contracts.

2. Analyze how investors can make (or lose) money from put and call options by creating an exposure and hedging it with those tools (quantify).

3. Identify techniques that can be used for hedging.

4. Describe the motivations of investors for utilizing options.

5. Design a use of options combination strategies, such as spreads and straddles, to address a hedging exposure you develop. Select the best solution you think would address the exposure. 

6. Explain the function of futures contracts for speculators.

Answer 1

1.the characteristics of a option market is to provide the option holder with the right to buy a certain number of asset or sell a certain number of asset before a specific predefined maturity period.

Option market gives the liberty to the option holders to exercise their rights of holding the options when they find their right is exercisable inin their benefits by paying off a premium.

They can also choose not to exercise the option because these options are not mandatory exercisable because they are right in nature, not obligations.

Call options provide right to buy a certain specific number of asset within a predefined period and put option provides option to sell a certain specific number of asset within a specific period.

These options can be combined together for various hedging purposes also and the options are highly flexible and volatile.