Derivatives Essay

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Derivatives Instructor: Jim Kyung-Soo. Liew, Ph.D. Homework Assignment #1 Please answer the following questions from your textbook: “Options, Futures, and other Derivatives,” 8th Edition, by John C. Hull. Students may form groups of up to three people in each group, however, competing homework assignments individually is highly encouraged. You will need to hand in one hardcopy of your completed assignment with everyone’s full name on the cover sheet. No late homework assignments will be accepted. Chapter 1: 1.1, 1.2, 1.3, 1.5, 1.6, 1.8, 1.9, 1.11, 1.13, 1.18, 1.22 Chapter 2: 2.1, 2.5, 2.10, 2.19 Chapter 3: 3.1, 3.2, 3.3, 3.4, 3.6, 3.7, 3.10, 3.13, 3.23 Chapter 4: 4.1, 4.2, 4.3, 4.4, 4.5, 4.7, 4.8, 4.9, 4.11, 4.12, 4.16 Chapter 5: 5.1, 5.2, 5.3, 5.4, 5.6, 5.7, 5.10, 5.12 Chapter 6: 6.4, 6.6, 6.10 Problem 1.1 What is the difference between a long forward position and a short forward position? A long forward position means buying the underlying asset at a certain time for a certain price in the future while a short position means selling the asset in the future. Problem 1.2 Explain carefully the difference between hedging, speculation, and arbitrage. Hedging is used when a trader has an exposure to the price of an asset and uses derivatives to cease that exposure. Speculation means investing in an asset and betting on its price movement. Arbitrage means investing in two or more market at the time and profit from price difference. Problem 1.3. What is the difference between entering into a long forward contract when the forward price is $50 and taking a long position in a call option with a strike price of $50? When entering into a long forward contract, I must buy the underlying asset at the price of $50 in the future. But when taking a long position in a call option, I can choose to buy the asset at $50 when the price at that time

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