The maximum potential loss of the bull spread is limited to the amount paid for the premiums of the two options, or in other words amount paid to enter the bull spread position. Due to the fact that the value of the bull spread is not dependent on implied volatility, which his possible to anticipate up to some degree, and that it is rather dependent on other market factors, this strategy is usually employed by veterans and experienced traders. These people are able to anticipate to what point the price of a particular stock will go up and decide whether to take a long position or employ the bull spread and make a profit on a temporary price increase. Bear Spread Second type of a vertical spread is a bear spread. Traders usually employ this strategy when they believe that the price of the underlying financial asset will go down.
One of the modern method that used to minimize the interest rate is by implementing short term interest rate future contacts (STIRS) (Beets, 2004). Future contracts are one of the most common derivatives used to hedge the risk. A future contract is an arrangement between two parties to buy or sell an asset at a particular period for specific pre-agree price. The main purpose that firms use future contracts is to offsets their risk exposures and limit themselves from changing in price. An interest rate future is a futures contract with an underlying instrument that pays interest.
There is also no interest charged on the asset. Liquidity – The seller is assured that this asset will be converted into quick cash with ease because the contract is sealed. Reduces Counter Party Risk – Future contracts reduces the chances of either party defaulting when a better offer is placed on the table. PRICING OF FUTURE CONTRACTS Pricing of future contracts can be done in a number of ways but two simple pricing models for futures contracts can be used to estimate how the price of a stock futures or index futures. These are; The Cost of Carry Model The Expectancy Model The Cost of Carry Model Futures pricing according to cost of carry model has two assumptions.
On the other hand, if the stop price goes up further to 150 then we will raise the stop loss to 135. If this stop loss gets triggered then the profit would be locked in. The advantage of using a trailing stop loss is that we were able to get more profits when the stock prices increases but at the same time have protection. For example, in the above case if the stock had turned around from 110 then we would exited positions at 99 and not lost any money. If it had turned from 150 that we would have exited positions at 135.
It says hedging is basically reducing exposure to something that can be risky to the firm or organisation. Hedging is done mainly and majorly to transfer risk and limit the risk exposure of the concerned person or organisation. Gold hedging that is talked about in this case is a
Crude oil, petroleum and all of the byproducts produced, are crucial to our country. Because of the rapid gain in population, supply and demand have a much larger goal to meet. The demand for crude oil in the United States alone will be up to 11.27 million barrels per day by 2019. Drilling sites for petroleum have been found to be very beneficial to this country. Due to the high demand, operations are able to provide market ready crude oil and byproducts.
World oil prices have fallen from time to time since 1970 which has sparked interest in understanding the causes and consequences. The price of oil has fallen so tremendously during certain eras that it impaired the world economic growth therefore cause many countries to be thrown into recession and high unemployment rates. This research essay is based on three major questions: • Identify the previous episodes • Compare and contrast the identified periods • What are the causes and consequences of the sharp drop These would present the implications of oil price drop, magnitude and the drivers as followed below: The Arab Embargo: 1973 It firstly started with the Yom Kipper War, which led an
• For the Liquidity Risk the company could try to anticipate cash flows and hedging activities to better function through strong banking and equity relationships to certify cost. • For the Commodity Risk the company could use option and future which are commodity derivatives this could lower the chances of risk by hedging against the variation in the price of oil. Analysis To what extent the company is hedging or
Managers consider ways to reduce volatility by either diversifying or hedging positions across industries and regions and hedging non-diversifiable market risk. However, the overall risk in this strategy is determined by whether a manager is attempting to prioritize returns (by having more concentration and leverage) or low risk (by creating lower volatility through diversification, lower leverage, and hedging). The core rationale of a long/short strategy is to shift principal risk from market risk to manager risk, which requires skilled stock
In a normal backwardation the spot price for an oil future derivative is larger than the prevailing price of a future. On the other hand, when the market moves into contango the prevailing future price is larger than the spot price. MGRM had created the hedge with the notion that the market would remain in backwardation. This miscalculation amplified the costs of running the hedge fund even further and led to what is known as “rollover losses”. When both the oil forwards and future market transitioned into contango, the company had to make payments to rollover all the stacked future contracts before expiration.