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Options, Futures and Derivatives Problem

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Solution Summary

The options, futures and derivative problems are examined.

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Please see the attached file for your study guide.

Options, Futures and Derivatives Problem
Below is your study guide.

Understanding the Scenario
Before making any specific discussion geared towards the 4 requirements, let me guide you through the entire scenario first.

First, the portfolio manager actually holds a position on 3 underlying assets - US Treasury note, corporate bond, and Schatz - rather than being long or short on derivatives designed around these underlying. This is important to note since hedging derivative and underlying positions are two different strategies.

Second, when we say elevated risk of extreme volatility we mean that the risk of the values of the above underlying assets spread out over a very large range of values is very high with individual security type prices changing very dramatically over a short period of time in either direction.

Third, a restriction as to how the 3 positions are to be hedged is identified - inability to sell the securities.

Fourth, the portfolio manager believes that the currency markets will move to their benefit and would ...

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