Financial Risk Manager Part 1
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Ultimate access to all questions.
An option trader at an equity hedge fund is assessing the cost structure of the fund's portfolio of options. The trader examines the types of positions the fund trades with its prime brokers and investigates whether the fund can reduce the upfront costs of its option positions. How can the trader transform a long option into a zero-cost derivative product?
A
Arranging with the option seller to pay an amount equal to the upfront option premium at maturity rather than at option initiation.
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.
C
Combining the purchase of the option with a sale of other options such that the net premium is zero and the combined payoff is identical to the payoff of the original option.
D
Purchasing the option and selling the underlying stock such that the net upfront cash flow is zero and the payoff is identical to the payoff of the original option.