First, read the case Derivative in Disguise.
Then answer the questions. In your initial response to the topic you have to answer all questions:
- What type of a derivative is the firm selling?
- What is the premium charged by the firm for these derivatives?
- Derivative traders always look out to grab arbitrage opportunities. Does the above scheme provide any hidden arbitrage opportunities?
- What are the potential risks to the firm once this scheme is launched? If there are any, how should the firm hedge its exposures?
- Reflection – the students also should include a paragraph in the initial response in their own words, using finance terminology,reflecting on specifically what they learned from the assignment and how they think they could apply what they learned in the workplace or in everyday life.
Please also note that your answers should be written in your own words. Don’t use quotes from the case.