02. What are the main difference between hedging with outright futures contracts
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02. What are the main difference between hedging with outright futures contracts with options on futures contracts? (5 points) and hedging Q3. What is an option's delta? Write down the formula for calculating call and put options delta. (5 points) 04. How do you calculate the minimum-variance hedge ratio using an option's delta? (5 points) Q5. The second page of the spread sheet (titled Put) sent to you by email lists daily futures prices (cents/lb.) of Dec 2014 CME Live Cattle futures contract and the premiums of a put option with SP 160 cents/lb. For each day, calculate the put options delta and hedge ratio in the spread sheet and list the average delta and the hedge ratio based on the average delta here. (5 points for spreadsheet workout and 5 points for right answers) Answer: Average ?-:Explanation / Answer
ans2. difference between hedging with futures and options:-
diff1 : Obligation
A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Here, the buyer is obliged to buy the asset on the specified future date.
An options contract gives the buyer the right to buy the asset at a fixed price. However, there is no obligation on the part of the buyer to go through with the purchase. Nevertheless, should the buyer choose to buy the asset, the seller is obliged to sell it.
diff 2 : Risk
The futures contract holder is bound to buy on the future date even if the security moves against them. Suppose the market value of the asset falls below the price specified in the contract. The buyer will still have to buy it at the price agreed upon earlier and incur losses.
The buyer in an options contract has an advantage here. If the asset value falls below the agreed-upon price, the buyer can opt out of buying it. This limits the loss incurred by the buyer.
In other words, a futures contract could bring unlimited profit or loss. Meanwhile, an options contract can bring unlimited profit, but it reduces the potential loss.
diff 3: upfront cost
Aside from commissions, an investor can enter into a futures contract with no upfront cost, whereas buying an options position does require the payment of a premium. Compared to the absence of upfront costs of futures, the option premium can be seen as the fee paid for the privilege of not being obligated to buy the underlying in the event of an adverse shift in prices. The premium is the maximum a purchaser of an option can lose.
diff 4 :Contract execution
A futures contract is executed on the date agreed upon in the contract. On this date, the buyer purchases the underlying asset.
Meanwhile, the buyer in an options contract can execute the contract anytime before the date of expiry. So, he is free to buy the asset whenever he feel the conditions are right.
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