MIS 4500 Lecture : Chapter 42.docx

• School: University of Manitoba
• Department: Management Info. Systems
• Course: MIS 4500
• Professor: Pourang Irani

Document Summary

Chapter 42: risk management applications of option strategies. Risk management strategies w/ options and the underlying: Reduce exposure to underlying by: 1. selling a call; or 2. buying a put. Covered call: underlying plus short call: profit: Protective put: underlying plus long put: profit, can be viewed as insurance. Money spreads: (as compared to time spreads: which differ by expiration date, bull spreads: makes money if market rises: long position in call w/ exercise price and short position in call w/ higher exercise price. Breakeven price: bear spreads: makes money if market goes down: sell call w/ exercise price and buy call w/ higher exercise price; or: buy put w/ exercise price and sell put w/ lower exercise price. Breakeven: butterfly spreads: combines bull and bear spread: buy calls w/ exercise price x1 and x3 and sell two calls w/ exercise price x2.