Explain the concept of moneyness?  

Explain the concept of moneyness?

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Explain, concept, moneyness?

Q-1.  The current stock price be SAR 50 and that can go up or down by 20 percent per period. The risk-free rate is 10 percent. Use one binomial period.  (5 Marks)

Determine the two possible stock prices for the next period.   (1 Mark)

Determine the intrinsic values at expiration of a European call option with an exercise price of SAR 45.   (1.5 Marks)

Find the value of the option today.   (1.5 Marks)

Calculate the hedge ratio.  (1 Mark)

Q-2.  Explain the concept of moneyness?  (3 Marks)

Q-3. Explain the Options and discuss the difference between American and European options.

(2 Marks)

Answers:

1-

2-

3-

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Q-4 Derivatives are used to manage financial risk. Do you agree? (100-150 Words)

You are required to reply to at least two peer answers. These post replies must need to be substantial and constructive. (40-60 Words per response)

Peer answer 1: All participants in the financial market find that financial derivatives are useful tools for risk management, and they are used by three types of market participants: commercial banks, investment banks, and investors. Easy to understand and that can create credit risk and so must be understood Complex derivations depend on complex models to use which leads to the risk of this chosen model There are credit rating agencies explaining this complexity to investors but their rating can be misunderstood and as a result, may create several risks
It appears that finding a variety of derivative products may be useful for their own risk management purposes and there are several ways and strategies for using a financial derivative can be beneficial for risk management. At the same time, derivatives present some significant challenges to risk management.

Response 1: –

Peer answer 2: Derivatives are most commonly exchanged to decrease risk or to bet on increasing risk in order to make a profit, and their value is determined by the quantity demanded for the asset (Chance & Brooks 2015). If an investor with sterling accounts wished to buy shares in a firm with dollars, they would indeed be subjected to exchange rate risk because the value of the pound could fall or grow against the dollar over the investment term, influencing the value of their investment. To avoid this danger, the investor could purchase a currency derivative to lock in a set exchange rate and protect their funds.

Response 2: –

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(Kindly site question (4) separately) 

Background: You are the manager of an e-cigarette store（an Vape shop) and you are planning to launch a “subscription” service

where customers can choose to receive bi-weekly or monthly refills of products from the store. And here’s what you need to consider and do.

why do you think this “subscription” service is effective? 2. If this service is implemented, how will it change the store? How do we compare to our peers? 3. what makes this service attractive to customers? 4. what do you need to do to prepare for this service? 5. What are the possible problems you may encounter during the preparation or implementation phase? How do you

plan to solve them? 6. please list the details of each step of the process from preparation to implementation. 7. If you need to collect customers’ opinions, how do you need to do it? 8. How long will it take for the service to pay for itself since it will be free shipping? (Use the following data) 9. How long is the “trial” period for this service? Why is this time set? 10. From the above analysis, do you think this service is feasible?

Vape:

DATA:

Estimate packs of pods sold (Monthly)

Profit (Monthly)

Cost increase (Monthly)

Revenue (Monthly)

premises: Shipping fee for each order is $9

Without Subscription Service 800 $16,000 $4,800 $11,200

With Subscription Service 1100 $21,400.00 $7,140.00 $14,260.00

Total Revenue Increase $3,060.00

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