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Explain the pay-offs for a long forward, short forward, long put, short put, long call and...

  1. Explain the pay-offs for a long forward, short forward, long put, short put, long call and short call, and set an example on how you could use each one of these instruments as a hedge
  2. Explain the main benefits for a right issue for your company
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Answer #1

Long forward : it is a contract of purchasing a security at some future pre defined date T at certain pre defined Price which is called strike price. Hence pay off at expiry is the difference between strike price and price as on that date.

Short forward : it is the contract of selling a security at some future time T at certain price i.e strike price S. Pay off at expiry is the difference between strike price and price as on expiry.

Long put : it is a buying a contract of selling a share at some future date. Contract is being bought by paying option premium. Pay off on expiry = strike price - trike premium - price on maturity

Option may not be availed at future date. In that price there is loss of premium only.

Short put : it is selling a contract of selling a share. Option premium is received in this case. Pay off = option premium and strike price in case put buyer avails it. In case he doesn't option premium is still received.

Long call : it is buying a contract of buying a share. Option premium is paid. At maturity option might not be availed. Pay Off = prce on maturity - strike price - option premium. In case doesn't avail option premium is still paid

Short call : it is selling a contract of buying a share. Option premium is received . In case option is availed by call buyer, pay off = option premium and strike price. In case he doesn't, option premium is still received.

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