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Buy options?

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Buy options?

  • This topic has 10 replies, 3 voices, and was last updated 8 years ago by John Moffat.
Viewing 11 posts - 1 through 11 (of 11 total)
  • Author
    Posts
  • November 8, 2012 at 9:02 am #55074
    dazhong0703
    Member
    • Topics: 44
    • Replies: 130
    • ☆☆

    When hedging with traded options, why do we always buy options, and don’t sell options? A lot of suggested answers are like that.

    November 8, 2012 at 8:43 pm #106717
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    We can buy or sell options.

    However, since we want the right to convert money at a fixed exchange rate, we need to buy the right and therefore pay a premium for it. Buying the option is buying the right to convert at a fixed rate. We can buy the right to buy the currency at a fixed rate (i.e. buy a call option) or we can but the right to sell the currency at a fixed rate (i.e. buy a put option).

    November 9, 2012 at 3:18 am #106718
    dazhong0703
    Member
    • Topics: 44
    • Replies: 130
    • ☆☆

    Since most of companies are buying the options, will it change the price/demand of the options? Why are there someone is selling options? They are not hedging?
    Thanks.

    November 10, 2012 at 8:54 pm #106719
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    The price of the options depends on the likelihood of the buyer exercising the option, which depends on the exchange rates.

    Its like buying insurance for a car – everyone is buying it (not selling) but the price does not depend on how many are buying, it depends on how many are claiming.

    November 17, 2012 at 6:18 am #106720
    dazhong0703
    Member
    • Topics: 44
    • Replies: 130
    • ☆☆

    I saw for collar, can sell options. Collar is OTC. So does it mean for OTC options can sell, but traded options cannot? Why?

    November 17, 2012 at 9:19 pm #106721
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Collar is not necessarily OTC. In the exam from memory the collars have always been created from traded options.
    You can buy and sell traded options.

    November 18, 2012 at 3:34 am #106722
    dazhong0703
    Member
    • Topics: 44
    • Replies: 130
    • ☆☆

    Since buying traded options is for hedging purpose while selling is not, then is selling traded options for speculating purpose, pls?

    November 18, 2012 at 6:52 am #106723
    dazhong0703
    Member
    • Topics: 44
    • Replies: 130
    • ☆☆

    What is the difference between delta hedge and options on stock index futures?
    Thank you.

    November 18, 2012 at 9:18 am #106724
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    A delta hedge is dealing in options on one particular share (the same share that you are trying to hedge the risk on).
    The stock index is the average of the stock exchange as a whole, and so the amount you would have to trade in depends on the relative riskiness (the beta) of the particular share at risk.

    February 24, 2017 at 2:14 pm #374013
    stephenlyimo
    Member
    • Topics: 0
    • Replies: 2
    • ☆

    in case in the exams i have been given the following
    a) a US company imports from UK, hence expect invoice in POUND.
    what option (Put or Call) will he buy when is in OTC and when is In the Counter.

    b) A US company exports to UK and Invoiced in POUND.
    what option (Put or Call) will he buy when is in OTC and when is In the Counter.

    February 24, 2017 at 4:57 pm #374039
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    (a) They will buy Pound call options because they will be paying pounds and therefore want the right to buy pounds.

    (b) They will buy Pound put options because they will be receiving pounds and therefore want the right to sell pounds.

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Viewing 11 posts - 1 through 11 (of 11 total)
  • The topic ‘Buy options?’ is closed to new replies.

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