Nick Leeson sold short straddles and combined them with long futures contracts. What hybrid would he have created if he combined long call options on the Nikkei Index and with long forward contracts? Why did he sell options instead of buying them?
What will be an ideal response?
A long call and a long forward contract are bets that market prices will rise. The combination of a long call and a long forward creates a hybrid that has the look of a long call but with profits that rise at an accelerated rate. Leeson sold options instead of buying them because he needed the cash to meet his margin calls.
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