what are the differences between buying a call option, selling a call option, bu
ID: 2701510 • Letter: W
Question
what are the differences between buying a call option, selling a call option, buying a put option, and selling a put option. Also, give an example of a business scenario in which it would be appropriate to use each of the contracts (a put and a call contract). If, instead, you chose to use the forward market, assume you were going to receive 100,000 Japanese yen in 6 months, and the current exchange rate is 5 yen to 1 U.S. dollar. How many yen would you sell or buy in the forward market? Be sure to cite all references using the appropriate citation format.
Explanation / Answer
If you buy a call option, you buy the right to buy a commodity (shares, whatever) at the price set in the option. So, if if the market price goes up enormously, you have the right to buy at the strike price. Once you've bought you can sell at the market price and you get the profit. You sell a call option, if you think the market will stay the same or go down - you make money on them!
If you sell a put option, you sell the right for the buyer to sell you the shares (commodities, whatever) at the agreed price (the strike price). They would exercise the option, for example, if the prices dropped way below the strike price, and you'd have to pay the strike price, even if you could buy the shares at a far lower market price. So, it's a good thing to do, if you think the prices are going to go up. Buying put options is great if you think the price of the shares will drop. You wait for the market to drop, and then you get the other person to buy at a higher price (profit!)
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