Question

Explain the following statement: Options have considerable upside potential but limited downside risk.

Explain the following statement: Options have considerable upside potential but limited downside risk.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

A long position on option has upside potential and limited downside risk. Option gives the right to its buyer to sale or buy the asset in future by paying certain amount of premium. If in future asset price moves favorably it will give the option holder huge potential to make profit. Example call ooption on facebook at strike price of $200 will give the right to its holder to buy facebook share at this price of $200 by paying premium of say $10. in few days if the price of facebook share reaches to 300 USD holder will exercise his right and will make profit of 300-200-10 = 90 USD. Thus by paying just 10 USD will provide handsome return. Same is the case with put option but this will give the right to sale ..

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Explain what the following statement means: “Bonds should be issued only if the potential increase in...
Explain what the following statement means: “Bonds should be issued only if the potential increase in interest rates is attributed to a strong demand for loanable funds RATHER than the FED’s reduction in the supply of loanable funds.”
analyze the risk and return of corporate investments and financing options. Include analysis of the following...
analyze the risk and return of corporate investments and financing options. Include analysis of the following in your statement: High-yield corporate bonds Small cap stocks Blue chip stocks U.S. Treasury bonds
You have been approached by a potential client who could bring you considerable business. She says,...
You have been approached by a potential client who could bring you considerable business. She says, "I'd like to find an alternative vendor for my future orders of 5,000/yr., but their pricing must be competitive." Your CFO has supplied you with the following information. Current product standard costs are as follows: Selling price per unit: $5,000 $1,400/unit direct material $400/unit direct labor $200/unit variable overhead $200/unit fixed overhead (this figure is the result of the budgeted fixed overhead of $2,000,000...
This question is about Options Trading, Pls, elaborate the following statement: 1- If you don't have...
This question is about Options Trading, Pls, elaborate the following statement: 1- If you don't have enough buying power to exercise, We'll sell your contracts about an hour before the market close. 2- what does it mean to exercise options upon its date.
Explain why following statement is not correct: “The higher the risk of my portfolio, the higher...
Explain why following statement is not correct: “The higher the risk of my portfolio, the higher the expected return I should get. Otherwise nobody will take any risks.” Use CAPM formula to help you understand.
20 Int Rate Risk Mgmt) State whether you agree or disagree with the following statement. Explain...
20 Int Rate Risk Mgmt) State whether you agree or disagree with the following statement. Explain why. "Value at risk (VaR) is a technique that determines the maximum possible loss to the value of a security or an institution under the worst possible circumstances".
A Finance professor you know makes the following statement: The payoffs to call and put options...
A Finance professor you know makes the following statement: The payoffs to call and put options depend on the stock price. If an investor expects the stock price to increase, he or she can trade options to make a tidy profit. i. What trades should the investor place in calls? In puts? Explain. ii. How do you react to the professor’s statement?
Briefly but completely explain how the potential for systemic risk underlies many of the aspects of...
Briefly but completely explain how the potential for systemic risk underlies many of the aspects of bank regulation. Your answer should include examples of how safety and soundness regulation is implemented that seek to limit the scope of systemic risk.
Which of the following is a FALSE statement about DRIs? Question options: They are a set...
Which of the following is a FALSE statement about DRIs? Question options: They are a set of recommendations for the proper intake of nutrients They were developed by the Institute of Medicine They are set to ensure that your body is getting what it needs for good health DRIs stands for Daily Recommended Intakes Which of the following tests might be performed during a Biochemical Assessment? Question options: Blood tests Checking the weight-to-height ratio Inspecting the finger nails Checking the...
Briefly explain why a tracker fund offers a lower risk (and potential return) than shares in...
Briefly explain why a tracker fund offers a lower risk (and potential return) than shares in a single company.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT