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Option Sem1

Ram wants to purchase shares in the future and is concerned about price fluctuations. He can hedge this risk by buying call or put options. With a call option, he has the right to buy shares at a set strike price even if the market price rises above that. With a put option, he has the right to sell shares at a set strike price even if the market price falls below that. The examples show how options allow Ram to limit his losses or gains depending on the market conditions and his choice to exercise the option.

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66 views

Option Sem1

Ram wants to purchase shares in the future and is concerned about price fluctuations. He can hedge this risk by buying call or put options. With a call option, he has the right to buy shares at a set strike price even if the market price rises above that. With a put option, he has the right to sell shares at a set strike price even if the market price falls below that. The examples show how options allow Ram to limit his losses or gains depending on the market conditions and his choice to exercise the option.

Uploaded by

api-3849048
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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Hedging Through Call option

Ram an investor is bothered about the increase in the share price of a company.
So He wants to buy 100 shares 2 months from now.

He can hedge himself by buying a call option to purchase.

No. of Shares Strike Price/Share Premium/Share

100 1000 10
100000 1000
Now he has the right but not the obligation to purchase.

Situation - 1 At the end of 2 months


If Spot Price increases Rs. 1500/share

He will go for option so he will pay =1000x100 100000


Now he will sell the shares =1500x100 150000
Profit 50000
Less: Premium 1000
Net Profit 49000

Situation - 2 At the end of 2 months


If Spot Price decreases Rs. 900/share

He will not go for option so he will pay =900x100 90000


Add: Premium 1000
Total Purchase Price 91000

Hedging Through Put option

Ram an investor is bothered about the decrease in the share price of a company.
So He wants to sell 100 shares 2 months from now.

He can hedge himself by buying a put option to purchase.

No. of Shares Strike Price/Share Premium/Share

100 1000 10
100000 1000
Now he has the right but not the obligation to sell.

Situation - 1 At the end of 2 months


If Spot Price increases Rs. 1500/share

He will not go for option so he will get =1500x100 150000


Less: Premium 1000
Net Profit 149000

Situation - 2 At the end of 2 months


If Spot Price decreases Rs. 900/share

He will go for option so he will get =1000x100 100000


Less Premium =10x100 1000
99000
Market Price of 100 shares =900x100 90000
Net Profit 9000

Here his breakeven is 1000 -10 = 990


Since he sells at Rs. 1000, he makes a profit of Rs.90 (990-900) per share
Hedging Through Call option

Ram an investor is bothered about the increase in the share price of a company.
So He wants to buy 1000 shares 4 months from now.

He can hedge himself by buying a call option to purchase.

No. of Shares
Strike Price/Share
Premium/Share

1000 1000 10
1000000 10000
Now he has the right but not the obligation to purchase.

Situation - At
1 the end of 4 months
If Spot Price increasesRs. 1500/share

He will go for option so=1000x1000


he will pay 1000000
Now he will sell the shares
=1500x1000 1500000
Profit 500000
Less: Premium 10000
Net Profit 490000

Situation - At
2 the end of 4 months
If Spot Price decreasesRs. 900/share

He will not go for option


=900x1000
so he will pay900000
Add: Premium 10000
Total Purchase Price 910000

Hedging Through Put option

Ram an investor is bothered about the decrease in the share price of a company
So He wants to sell 1000 shares 4 months from now.

He can hedge himself by buying a put option to purchase.

No. of Shares
Strike Price/Share
Premium/Share

1000 2000 10
2000000 10000
Now he has the right but not the obligation to sell.

Situation - At
1 the end of 4 months
If Spot Price increasesRs. 2500/share

He will not go for option


=2500x1000
so he will get
2500000
Less: Premium 10000
Net Profit 2490000

Situation - At
2 the end of 4 months
If Spot Price decreasesRs. 1800/share

He will go for option so=2000x1000


he will get 2000000
Less Premium 10000
1990000
Market Price of 1000 shares
=1800x1000 1800000
Net Profit 190000

Here his breakeven is 2000 -100 = 1990


Since he sells at Rs. 2000, he makes a profit of Rs.190 (1990-1800) per share
e in the share price of a company.

se in the share price of a company.


f Rs.190 (1990-1800) per share

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