Options that existed before the corporate action occurred (the spin-off) must reflect the value of both companies together. A central part of option trading revolves around selecting the appropriate strike for a particular strategy.
So before we did these calculations, it looked like this option was out-of-the-money and the price of $2.60 was all time premium. For a futures contract to provide a good hedge for a spot risk, futures price must bear close relationship to spot price of asset being hedged.
Beginning in 1992, MGRM began selling 5–year and 10–year fixed-price oil supply contracts to a number of customers.
MGRM hedged its exposure using exchange-traded futures contracts via a "stack-and-roll" hedging strategy.
Rolling over futures positions at the end of each month involves 1.Closing out the existing long futures position by taking a short futures position in the expiring contract.
After looking at the options chain you notice that some of the calls appear to have a lot of juice in them. First, the ZRW AD option highlighted in the chain above represents 100 shares of DUK and 50 shares of SE.
The customers were also provided with an option that allowed them to void the contract (at a profit) if oil spot prices rose rapidly. If oil prices rise, there would be a loss on the forward contracts, but a gain on the long futures positions. In this case, it was determined that one option would be equal to 100 shares of DUK plus 50 shares of SE. In the case of a covered call trade using this option, I would be covered only if I owned both stocks (100 DUK and 50 SE). Without doing more research, all we know is that this option represents something other than 100 shares.
Unlike forward contracts, holders of futures contracts can unilaterally reverse (or "close out") their positions.
The initial success and subsequent failure of the contract can be traced to the poor specification of delivery options. Conclusion: The delivery options must be specified such that the current coupon mortgages are typically the cheapest-to-deliver.
Equivalently, it overstates the adjustment factor for high-coupon mortgages relative to that for low-coupon mortgages. Position limits made it impossible to completely hedge MGRM's total commitments of 160 million barrels using only futures contracts. If you look closely you will see both of these options have different symbols, so this is accurate data. So if you are getting excited when comparing the premiums of these two options, hold your horses! The second thing we know is since the call is based on two stocks, the premium of the option needs to be clarified.
We need to figure out why the regular option is worthless and the non-standard option is $2.60 bid. Interest in the contract never revived as Treasury futures and other contracts supplanted it as the hedge vehicles of choice.
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