21 Sep Derivatives Innovation
“Speculators (who long futures) and Hedgers (who have a long hedge) share the same prediction that the underlying asset price will increase in the future.” True or False?
Please explain your answer with example(s). Hint: review Class #3 presentation and recall our discussion in Week #4 class meeting.
Question 1 – Part (B)
“Basis, defined as the difference between Spot Price and Futures Price, can never be negative.” True or False?
Please explain your answer with example(s). Hint: review Class #3 presentation, Section 2, p. 6.
Question 3 – Part (A) [Motivations of the Proposed New Derivatives]
Importantly, use real data to construct and measure the new underlying asset/index.
Based on your own insights and your original ideas, discuss the following:
What new derivative product would you introduce to the derivatives markets?
What are the most important (or unique) aspects of this new derivative product?
What are the main reasons, motivations, and needs (demands) for your proposed new derivative product?
For example, discuss how your proposed new derivative contract may provide hedging (risk management) and/or speculation for businesses, institutions, and investors.
Important Note: Your proposed new derivative contract should be options contracts (including Call Options and Put Options) based on a new underlying asset (or index), which can be tradedable or non-tradeable.
Most importantly, make sure that you introduce a new derivative product that is NOT currently/already traded in the derivatives markets.
Question 3 – Part (B) [Underlying Asset of the Proposed New Derivatives]
First step: discuss whether your proposed underlying asset/index is “Tradeable or Non-Tradeable”.
Second step: discuss whether your proposed underlying asset/index is subject to “Market Manipulation”.
Third step: discuss whether your proposed underlying asset/index shows “Volatility and Uncertainty” (hint: historical data will be useful and important).
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