Financial Risk Manager Part 1
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A trader working for an equity hedge fund is scrutinizing the fund's options portfolio, particularly focusing on the expense structure associated with it. The trader aims to understand the nature of the positions that the fund takes with its prime brokers and is interested in exploring strategies to lower the initial costs tied to the fund's options positions. What approach can the trader utilize to transform a long option into a derivative instrument that incurs no initial cost?
A trader working for an equity hedge fund is scrutinizing the fund's options portfolio, particularly focusing on the expense structure associated with it. The trader aims to understand the nature of the positions that the fund takes with its prime brokers and is interested in exploring strategies to lower the initial costs tied to the fund's options positions. What approach can the trader utilize to transform a long option into a derivative instrument that incurs no initial cost?
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A
Arranging with the option seller to pay an amount equal to the upfront option premium at maturity rather than at option initiation
11.6%
B
Entering into an agreement to purchase the payoff of the option at maturity for an amount equal to the future value of the current option premium
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