Chartered Financial Analyst Level 1
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An analyst evaluates three portfolios, each comprising two derivatives on the same underlying asset. The portfolios are structured as follows:
- Portfolio 1: Long Forward Position and Long Call Option
- Portfolio 2: Long Forward Position and Long Put Option
- Portfolio 3: Short Forward Position and Long Call Option
Assuming all other factors remain constant, which portfolio is most likely to benefit from an increase in the underlying asset's price?
An analyst evaluates three portfolios, each comprising two derivatives on the same underlying asset. The portfolios are structured as follows:
- Portfolio 1: Long Forward Position and Long Call Option
- Portfolio 2: Long Forward Position and Long Put Option
- Portfolio 3: Short Forward Position and Long Call Option
Assuming all other factors remain constant, which portfolio is most likely to benefit from an increase in the underlying asset's price?
Explanation:
Explanation:
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Portfolio 1 (Correct Answer): A long forward position and a long call option both benefit from an increase in the underlying asset's price. The long forward position gains directly from the price rise, while the long call option increases in value as the underlying price exceeds the strike price.
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Portfolio 2 (Incorrect): A long put option benefits from a decline in the underlying asset's price, not an increase. Therefore, this portfolio would not gain from the specified scenario.
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Portfolio 3 (Incorrect): A short forward position loses value when the underlying asset's price rises, offsetting any gains from the long call option. Thus, this portfolio would not benefit overall from the price increase.