Investment Risk Management–
Evaluate Options, Futures, and Swaps
Examine derivative securities: options, futures, and swaps. Investors and financial institutions that make use of these derivative securities to take positions are either speculators or hedgers. Speculators are attempting to predict the direction of some economic or market variable and generate gains on those predictions using derivative securities. Hedgers will have a specific operational risk that could be transferred using these derivative securities.
A call option is the right to buy an asset at an agreed-upon exercise price. A put option is the right to sell an asset at a given exercise price. American-style options allow exercise on or before the expiration date. European options allow exercise only on the expiration date. Most traded options are American in nature. Options are traded on stocks, stock indexes, foreign currencies, fixed-income securities, and several futures contracts. Options can be used either to lever up an investor’s exposure to an asset price or to provide insurance against volatility of asset prices. Popular option strategies include covered calls, protective puts, straddles, spreads, and collars.
Course Learning Outcomes
5.0. Compare and contrast values and risk Portfolio performance-international diversification, and hedge funds
Support your paper with minimum of seven (7) scholarly resources. In addition to these specified resources, other appropriate scholarly resources, including older articles, may be included.
Length: 5-7 pages not including title and reference pages
Professor Overview: Futures, Swaps, and Risk Management
According to Bodie, Kane, and Marcus (2014), investors such as hedge funds use hedging strategies to create market-neutral bets on perceived instances of relative mispricing between two or more securities. They are not arbitrage strategies, but pure plays on a particular perceived profit opportunity. Interest rate futures contracts may be written on the prices of debt securities (as in the case of Treasury-bond futures contracts) or on interest rates directly (as in the case of Eurodollar contracts). Swaps, which call for the exchange of a series of cash flows, may be viewed as portfolios of forward contracts. Each transaction may be viewed as a separate forward agreement. However, instead of pricing each exchange independently, the swap sets one “forward price” that applies to all of the transactions. Therefore, the swap price will be an average of the forward prices that would prevail if each exchange were priced separately.