Propose TWO option combination strategies that involve more than one option contract for the USD variable rate...

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Finance

Propose TWO option combination strategies thatinvolve more than one option
contract for the USD variable rate loan (USD 20m), forall relevant risks
faced by this portfolio. OceanaGold’smanagement has expressed a desire to
retain some of the upside benefits that hedging with options canpermit but
without paying a lot of money in option premiums. That is, yourrecommended
strategies should provide a “reasonably effective” hedge butkeep the option
premium payment limited to a “reasonable amount” (it does nothave to be zero!).
As the strategist, it is up to you what you consider“reasonable” for this purpose.
You must also describe the benefits and possible shortcomings ofyour proposed
option strategies. You must use actual option data toillustrate your option
strategies and to hypothetically demonstrate their benefits andshortcomings.
Calculate the number of contracts required for each strategy andprovide the
strike prices and total premium costs.

Answer & Explanation Solved by verified expert

3.9 Ratings (476 Votes)

Various combination of options strategies exotic options allow us to hedge our risk For reducing the downward risk we can use any of the following two strategies 1 Bull Call Spread This See Answer

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Propose TWO option combination strategies thatinvolve more than one optioncontract for the USD variable rate loan (USD 20m), forall relevant risksfaced by this portfolio. OceanaGold’smanagement has expressed a desire toretain some of the upside benefits that hedging with options canpermit butwithout paying a lot of money in option premiums. That is, yourrecommendedstrategies should provide a “reasonably effective” hedge butkeep the optionpremium payment limited to a “reasonable amount” (it does nothave to be zero!).As the strategist, it is up to you what you consider“reasonable” for this purpose.You must also describe the benefits and possible shortcomings ofyour proposedoption strategies. You must use actual option data toillustrate your optionstrategies and to hypothetically demonstrate their benefits andshortcomings.Calculate the number of contracts required for each strategy andprovide thestrike prices and total premium costs.