In the 2002 shareholder letter, Warren Buffett described derivatives as 'financial weapons of mass destruction', carrying dangers that, while now latent, are potentially lethal. Derivatives include call and put options. Do you agree on Mr. Buffett's above statement? Provide justifications and appropriate explanation.
Q: When I buy an option, I gain rights, but I also have obligations to the option seller. True Or…
A: Options are important financial derivatives widely used in financial markets.
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Q: (1) If derivatives can be so risky, why do so manybusinesses continue to use this market to…
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Q: describe the major differences between forward contracts and option contracts. b)discuss…
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Q: Choose which sentance is false. A. When you own a call option, you have the right to buy the…
A: The option contracts are the derivative financial instruments that can be classified as the call…
Q: a) If you must buy some asset in future and you just want to hedge the risk what sort of derivative…
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Q: What are the main arguments against the old definition (i.e. the one presented in Appendix A of AASB…
A: Disclaimer: “Since you have asked multiple questions, we will solve the first question for you. If…
Q: Explain why speculating in derivatives, futures contracts and options is not appropriate for the…
A: Speculation regulates the international financial system. Future action in stock market is dependent…
Q: All investments in equity instruments and contracts on those instruments must be measured at fair…
A: Solution: Cost may be an appropriate estimate of fair value in the following: 1. Insufficient more…
Q: ABC Co. has recently purchased ordinary shares of XYZ Co, one of its competitors, as part of a…
A: a. Call option is purchased when the share price of a company is expected to increase in the future.…
Q: All investments in equity instruments and contracts on those instruments must be measured at fair…
A: Solution: All investments in equity instruments and contracts on those instruments must be measured…
Q: According to Peter Bernstein "When we take a risk, we are betting an outcome that will result from a…
A: Risks are the situations and conditions that have exposure to losses or damages. Risks expose…
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A: A derivative is a financial contract whose value is derived from the underlying asset, which could…
Q: 2) Which of the following statements is FALSE? A) The option buyer, also called the option holder,…
A: Option is a derivative contract which allows the buyer of the option a right to buy or sell the…
Q: The value derived from exercising an option immediately is the exercise value. No rational investor…
A: “Hi There, thanks for posting the question. But as per Q&A guidelines, we must answer the first…
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A: Primary market is a type of capital market where securities will be issued for first time. The…
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Q: why do the tax-exempt securities can be risky in an investment?
A: Tax-exempt securities, such as municipal bonds, can be risky in an investment for several reasons.
Q: The use of the fair value option to account for Non - current liabilities is allowed by IFRS . Many…
A: Under fair value accounting the assets and liabilities are recorded in the financial statements at…
Q: hedge
A: “Since you have posted a question with multiple sub-parts, we will solve the first three subparts…
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Q: One can use Black-Scholes model to price any financial derivatives. true or false
A: The Black-Scholes model was specifically designed to value European-style options on non-dividend…
Q: [The following information applies to the questions displayed below.] Similarly, we estimate the…
A: Stock option means where the shares are issued to company employee or executives at less than the…
Q: 15. Which of the following statements is FALSE? A) The intrinsic value of an option is the value it…
A: Options are basically the contracts that give the buyer the right, on the other hand it does not…
Q: It's acceptable to use the Black-Scholes formula or binomial trees to value real options,even though…
A: Black Scholes and binomial models are the valuation models to value an option.
Q: Disagree. The Securities Act of 1933 ensures investors only that the issuer has complied with all…
A: The Securities Act of 1933, a landmark legislation enacted in response to the stock market crash of…
Q: pare.2
A: quotes from an active market like the TSXExplanation:The fair value hierarchy consists of three…
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A: The call option price or the value of call option is affected by various factors such as strike…
Q: 5. Which of the following is incorrect regarding establishing central counterparties (CCPs)? (a)…
A: As per our guidelines we are supposed to answer only one question (if there are multiple questions…
Q: How should this be understood, i dont understand how a positive value will give rise to a loss for…
A: OTC Market: OTC (Over the Counter) Market are markets where corporations trade derivatives without…
Q: As a call option is an option to buy and a put option an option to sell, the opposite position to…
A: Options give the buyer the right to purchase the underlying asset but not the obligation to exercise…
Q: In the Concepts in Action, the speaker mentioned, "A stock is fundamentally more difficult to value…
A: Common stock is a type of security that represents ownership in a corporation. Common shareholder is…
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Q: compare or contrast forwards and options:
A: Options are the financial derivatives used to cover up the risks in the derivatives market. in an…
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- How are derivatives valued on the balance sheet? How is the adjustment to fair value recorded differently for a cash flow hedge versus a fair value hedge? That is, how does the fair value adjustment of each type of hedge affect current period net income and the accounting equation? What are the three criteria that must be met for a derivative to be classified as a hedge? Once entities decide to buy or sell derivatives to hedge economic risks, they then need to decide whether they want to use hedge accounting; it is an election, not a requirement, even when the derivatives are for the economic purpose of hedging. This election is reminiscent of inventory accounting. Just like when a company selects an inventory method, a company is not required to select the accounting method (LIFO, FIFO, weighted average, specific unit) that most closely corresponds with the physical movement of inventory, although they are free to do so. If entities decide to elect hedge accounting, the following…The potential loss incurred from purchasing a call option is finite, but the potential loss to the seller is unbounded. Explain why the potential loss that the seller may occur is unbouned.What is a derivative? Give an example. Why do companies purchase derivatives? Accounting for Derivatives One reason accounting for derivatives is so complex is that different groups have different reasons for using them and those reasons affect whether the derivatives qualify for a particular type of accounting treatment. This treatment is called hedge accounting. Another reason for the complexity is that, even if an entity qualifies for hedge accounting treatment, it may choose not to implement hedge accounting treatment. Finally, derivatives are financial instruments with a vocabulary all their own, terms often covered in higher-level finance classes but not often encountered in our day-to-day lives. Together, these characteristics make understanding the intuition and accounting for derivatives particularly challenging. Initial recognition is straightforward. A purchaser records a financial instrument asset on the balance sheet at the purchase price. The…
- what is meant by the value of a potential takeover target as an independent firm ? when can a financial analyst can just use the current market valuation as the starting point for the valuation? what cant they? what is the difference between these two valuation, if any?Current GAAP recommends that the fair value method be used to account for compensatory stock option plans. From a conceptual point of view, this method is an improvement over the intrinsic value method. Required: Explain how the fair value method is an improvement over the intrinsic value method.Q9. How would you hedge the risk of a price rise using a derivative? Group of answer choices 1. You would take out a spot contract to sell the underlying. 2. You would take out a forward contract to sell the underlying. 3. You would take out a spot contract to buy the underlying. 4. You would take out a forward contract to buy the underlying.
- Discuss the following statement about hedging: “There is no such thing as a hedge. Any hedge is an act of taking a position that an adverse market movement will occur. This, itself, is a form of speculation.”The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock’s price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or “issue” new options, which is called writing options. Based on your understanding of exercise value and option prices, complete the table with a strike price of $30.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 20.00 30.00 0.00 1.56 40.00 30.00 12.10 2.10 50.00 30.00 22.40 2.40 55.00 30.00 25.00 27.60 60.00 30.00 34.00 4.00 After two weeks, the stock price of ABC Corp. increases to $62.40. Suppose you purchased the shares for $40.00 and then sell…Explain how a speculator can make speculation in spot, forward, and options markets. Which one do you think is more advantageous? Explain by making a comparison among these alternatives.
- I have been working on the question below and I'm stuck on how to finish it up. I have provided what I've done so far. Is what I've done so far correct? And how do I finish up the problem? Here is the question: Suppose that C is the price of a European call option to purchase a security whose present price is S. Show that if C>S then there is an opportunity for arbitrage (i.e. risk-less profit). You may assume the interest rate is r=0 so that the present value calculations are unnecessary. My work so far: There is an opportunity for arbitrage if we can create a portfolio that initially (time t=0) generates a zero net cash flow or a cash inflow, but still produce a positive or zero cash inflow at the time of expiration. Assume we are going to short sell one call option C, and buy one stock S. Consider the cash flows at time t=0.Cash flow of selling one call option: +CCash flow of buying one stock: -STherefore, since C>S, we have an initial cash inflow of C-S>0. We will now…Ethan Manufacturing Incorporated produces floor mats for automobiles. The owner, Joseph Ethan, has asked you to assist in estimating maintenance costs. Together, you and Joseph determine that the single best cost driver for maintenance costs is machine hours. These data are from the previous fiscal year for maintenance costs and machine hours: Month Maintenance Costs Machine Hours 1 $ 2,780 1,870 2 2,940 1,950 3 3,090 2,030 4 3,200 2,050 5 3,280 2,080 6 3,250 2,060 7 3,190 2,040 8 3,030 2,020 9 2,800 1,880 10 2,400 1,280 11 2,410 1,480 12 2,630 1,770 Required: 1. What is the cost equation for maintenance costs using the high-low method? 2. Calculate the mean absolute percentage error (MAPE) for the cost equation you developed in requirement 1.My company sells products that are a complement to the products sold by Grapefruit Electronics. When Grapefruit Electronics does well, sales of our products also increase. If Grapefruit Electronics is publicly traded with options available, what might be some ways to hedge our exposure using those options?
