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Explain why a futures contract can be used

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Reference no: EM133073764

a) Explain why a futures contract can be used for either speculation or hedging.

b) The current price of a stock is $94, and three-month call options with a strike price of $95 currently sell for $4.70. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an investment of $9,400. What advice would you give? How high does the stock price have to rise for the option strategy to be more profitable?

c) A futures contract is used for hedging. Explain why the daily settlement of the contract can give rise to cash flow problems.

Reference no: EM133073764

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