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    Derivatives and Forward Markets

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    Write a memo that talks about the differences in buying a call option, selling a call option, buying a put option, and selling a put option. Please give an example of a business scenario that would be appropriate to use in each of the contracts (put and a call contract). If one were to choose to use the forward market and were to receive 100,000 Japanese yen in roughly six months, and the current exchange rate was 5 yen equalling 1 US dollar, then with that information, how many yen would one sell or buy in the forward market?

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    Solution Preview

    The use of a call and put option, be it buying the options or selling the options, will depend on the scenario or situation faced by the buyer or the seller. Let us evaluate these various circumstances and understand the differences between these various options.

    A call option is an option that allows the buyer to purchase an underlying security at a predetermined price in a certain future timeframe, irrespective of the current price of the security prevailing at that timeframe in the future. For example, if a person expects that the price of a certain stock or commodity will go up in the future, he will purchase a call option now, which will entitle him to purchase the stock or commodity at a predetermined price. This is also called the exercise price of the call option, irrespective of the prevailing price in the future. The timeframe is limited to the ...