Differentiate between implied and historical volatility, Risk Management

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Question 1:

(a) What are the distinct types of assets under which derivatives can be based upon?

(b) Give at least 5 risks that justify the existence of derivatives? Endorse your answer using appropriate examples.

(c) Distinguish between futures and forwards.

Question 2:

(a) Mathematically derive the following positions:

i. Long position on a call option
ii. Short position on a put option

(b) Differentiate between implied volatility and historical volatility.

(c) Why options are considered as leveraged instruments? Explain fully with a proper example.


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