Show graphically and explain the profits and losses of buying futures relative to buying call options
What will be an ideal response?
See figure below.
As shown in the graph, the profit-loss function for futures is linear. Both gains and losses grow linearly for each $1 change in the underlying security price at expiration. The profit curve for options is nonlinear. The loss is limited to the amount of the premium. Profits are a linear function of the asset price at expiration, but profits from options are always less than for futures by the amount of the premium. The key differences are that options losses are limited, while futures losses are not. Gains for futures and options are linear functions of the expiration price, but option profits are always less than futures profits by the amount of the premium.
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Which of the following is the basic tenet of new classical economics?
a. A change in the fiscal policy affects the equilibrium level of real GDP but has no impact on the equilibrium price level. b. A government-induced shift in aggregate demand affects the real GDP only if they are expected by the economic agents. c. A change in aggregate demand affects the aggregate price level only if the aggregate supply curve is perfectly elastic. d. A change in monetary policy affects the equilibrium level of real GDP only if those changes are unexpected. e. An expected change in a monetary or fiscal policy leads to a proportional shift of the long run supply curve.
Which of the following is true for a market that clears?
a. An excess supply of anything traded will lead to a fall in its price. b. An excess demand of anything traded will lead to a fall in its price. c. An excess supply of anything traded will lead to a rise in its price. d. An excess demand of anything traded will not lead to a price change. e. A high price will lead to a high demand.