Solution 1 Different Instruments in Derivative Markets Derivatives or derivative securities are financial arrangements whose payments are derived from other
Solution Different Instruments in Derivative Markets Derivatives or derivative securities are financial arrangements whose payments
Solution Different Instruments in Derivative Markets Derivatives or derivative securities are
in Derivative Markets Derivatives or derivative securities are financial arrangements whose payments are derived from other
Solution Different Instruments in Derivative Markets Derivatives or derivative
securities are financial arrangements whose payments are derived from other
Solution Different Instruments in Derivative Markets Derivatives
Solution Different Instruments
(Solution) 1 Different Instruments in Derivative Markets Derivatives, or derivative securities, are financial arrangements whose payments are derived from other...

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Expected return on Put OptionIn the example in the attached material, why do you think the put option has a negative expected return (-16.67%), while the call option has a very high positive expected return (42.86%)?Compare the payoff patterns of these two options. When do they pay? Note that one pays when the economy is good, and the other pays when the economy is bad.ONLY COMPLETE ANSWER PROVIDERS TAKEOVER THIS QUESTION.1.1 Different Instruments in Derivative Markets Derivatives, or derivative securities, are financial arrangements whose payments are derived from other securities or assets. In other words, derivative markets are markets for contractual instruments whose performance is determined by how other securities or assets perform. Two major types of derivatives include option-type contracts and forward- type contracts . Options are the right, but not the obligation, to buy or sell an asset at a pre -set price (=exercise price or striking price) over a specified period. Forward-type contracts are the commitment to buy or sell a given asset at a set price on a future date. Forwards, futures, and swaps are included in this type. Read pages 2-4 of the textbook for more discussion of these types of derivative securities. Now in the rest of this lecture, we'll go over two concepts: (1) risk and risk aversion and (2) arbitrage. 1.2. Risk and Risk Aversion We all know that the expected return on a security is determined by the risk of the security, i.e., the higher the risk, the higher the expected return. Risk-averse investors ask for a premium for the risk they are taking. To understand the concept of risk-aversion, let's consider an imaginary economy where uncertainty is represented by the two states (good and bad) of the economy in the next period. In this simple economy, the good and the bad, economy has the same probabilities of 50%-50%. Let us further assume that the next three securities exist in an imaginary economy: T-bill Common stock 10 Call options written on the same common stock with the strike price (X) of 100 T-bill is the risk-free asset and will provide certain cash flow of $100 whether economy is good or bad. (See the table below.) The common stock pays off $120 and $80 in good and bad economy,

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