Exam questions Essay Example | Topics and Well Written Essays - 500 words

Exam questions - Essay ExampleIf the right hand is bought, it is called a long call if the right is sold, it is called a dead call. An option that gives the right in due course make a sale at a predetermined price is called a put option. If the right is bought, it is called a long put if the right is sold, it is called a short put.i) Flexibility - Options are an extremely flexible tool. Options arouse be bought or sold in many different combinations for many different investment opportunities (i.e. Stocks, indices) . This allows for an investor to take advantage of varied market conditions available at a time. Options can be traded to reference rising or declining markets, quiet markets or volatile markets with uncertain price directions.ii) Increased trading opportunities There are a great number of strategies that can be adopted while trading options. These create additional profit and risk management opportunities for traders thus an increase in returns.iii) Limited risk with inexhaustible profits If one buys a call option, they usefulness from unlimited profit potential as the stock moves higher while the investor who buys a put option, has the benefit of unlimited profit potential as the stock moves lower.Index options are financial derivatives that give the possessor the right, but not the obligation, to buy or care a basket of stocks, such as the Nasdaq 100 index options, at an agreed-upon price and before a certain date. An index option is comparable to another(prenominal) options contracts, the difference being the underlying instruments are indexes.One may use index options to hedge when there is need to protect the value of the portfolio of mixed stocks in case of a market decline. Index puts are utilised in this instance. Index puts are generally used to protect unrealised profits stemming from an investors portfolio. There may be various classes of options that are available