Expert answer:finance discussion qestion and responses week 8

Expert answer:follow attached instructions. This is a 2 part assignment first a discussion post and then 2 responses to 2 other students.
discussion_week_8.docx

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This is a 2 part assignment first write a discussion post and second write a
response to 2 other students discussions
Part 1
Write a discussion post answering the below questions with 300 words min and
APA style.
1. How can a put be used to protect a particular position? a call?
2. What is a stock index option? Why do investors use stock index option?
3. What is future contract? How to hedge with a futures contract?
Part2
Write a response (directly to them not 3rd Person) with 100 words min each. The
below student responses are also examples on how part 1 should be done
Student #1 Nadine
1. How can a put be used to protect a particular position? a call?
Protective put strategy used by investor to protect position: when an investor buys stock, it has
a risk of decline of stock price. This risk can be reduced by buying the put option with the stock.
If the stock will decline, the put value will increase, which can set off the loss of stock. The
investment strategy in which the investor combines put with the stock is known as the
protective put.
Protective call strategy used by investor to protect position: in the protective call strategy, the
investor combines the short sell of the stock with the call option. In short selling, there is a risk
of a price rise. This can be offset by the buying call option. As a stock increases, the call value
will be increased.
2. What is a stock index option? Why do investors use stock index option?
A stock index option represents the particular industry or group of stock. Investors can buy puts
and calls on various market indexes, thereby taking a position on broad market movements or
market segments (Jones, 2013, p. 531). Furthermore, it facilitates the investor to gain from the
markets as a whole. Stock index options are available on more than 50 stock indexes and are
even available on some industry sectors, including technology, Oil, the Internet, Gold and
Semiconductors. Stock-index options enable investors to trade on general stock market
movements or industries in the same way that they can trade on individual stocks (Jones, 2013,
p. 531). Being an investor in a stock index option will enable you to make market decisions
rather than individual stock decisions.
3. What is future contract? How to hedge with a futures contract?
A futures contract is a legal agreement, generally made on the trading floor of a futures
exchange, to buy or sell a particular commodity or financial instrument at a predetermined
price at a specified time in the future (Investopedia, 2017). According to Jones (2013, p. 547) a
futures contract is a standardized, transferable agreement providing for the deferred delivery
of either a specified grade and quantity of a designated commodity within a specified
geographical area or of a financial instrument (or its cash value).
The use of hedging techniques illustrates the tradeoff that underlies all investing decisions:
Hedging reduces the risk of loss, but it also reduces the return possibilities relative to the
unhedged position (Jones, 2013, p. 552). This is why hedging is used mainly by people who are
uncertain of future price movements and who are willing to protect themselves against adverse
price movements at the expense of possible gains.
References:
Investopedia. (2017). Futures Contract. Retrieved from
https://www.investopedia.com/terms/f/futurescontract.asp#ixzz4z9wnnQUF
Jones, C. P. (2013). Investments analysis and management (12th ed.). Hoboken, NJ:
Wiley
Student #2 Manuel
1. How can a put be used to protect a particular position? a call?
A put is an option contract giving the owner the right, but not the obligation, to sell a
specified amount of an underlying asset at a set price within a specified time. A call option gives
the holder the right, but not the obligation, to buy a stock at a certain price in the future. When
an investor buys a call, they expect the value of the underlying asset to go up. A put is the exact
opposite.
2. What is a stock index option? Why do investors use stock index option?
An index option is a financial derivative that gives the holder the right, but not the
obligation, to buy or sell the value of an underlying index, at the stated exercise price on or
before the expiration date of the option. Index call and put options are used by investors to
profit on the general direction of an underlying index while putting very little capital at risk
3. What is future contract? How to hedge with a futures contract?
A futures contract is as an arrangement between two parties to buy or sell an asset at a
particular time in the future for a particular price. The main reason that companies or
corporations use future contracts is to offset their risk exposures and limit themselves from any
fluctuations in price. The ultimate goal of an investor using futures contracts to hedge is to
perfectly offset their risk.
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