option trading in future

Jun 28th, 2015
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A. T. Still University
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Business, like life, is inherently risky. Firms convert inputs such as labor, raw materials, and machines, into goods and services. A firm is profitable if the cost of what it produces exceeds the cost of the inputs. Prices can change, however, and what appears to be a profitable activity today may not be profitable tomorrow. Many instruments are available which permit firms to hedge various risks, ranging from commodity prices to weather. A firm which actively uses derivatives and other techniques to alter its risk and protect its profitability is engaging in risk management.

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Understanding how a typicalOption Deal is done in the market PutOption By Prof. Simply SimpleTMI hope the last lesson on Optionshelped you in getting to understandthe concept.In continuation of that, we alsodiscussed the Call option for yourclarity on the subject.Having explained the Calloption, quite naturally,youll want to know aboutthe Put option.Let me try & explain to youhow this kind of an OptionDeal is practically done inthe market place.In the stock market there areseveral participants who areboth buyers and sellersA stock market is a platformwhere this is free flow ofinformationThis is so that the current stockprice is known to every participant(buyers and sellers) Any participanttrying to extract a higher price willnot be able to do so because of thefree flow of information whichprevents any sort of price arbitrage.This is what we call PriceDiscovery.Now lets say there is a stock option on stock A,which is currently quoting at Rs.100. And letssay the option expires after 5 daysNow lets say there are two participantsRam & Shyam in this market.Ram is of the view that the stock priceswould fall to Rs. 80 in the near future. ButRam does not want to take a risk (i.e. in casethe price rises to Rs 120).Hence he chooses to buy a put option whichprotects him against any rise in price. Forgetting this service, he would have to pay apremium to

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