Why would anyone write an option, knowing that the gain from receiving the option premium is fixed, but the loss, if the underlying price goes in the wrong direction, can be extremely large?
Answer to relevant QuestionsWhat are the major differences between short-term and long-term forecasts for a fixed exchange rate versus a floating exchange rate? What were the main causes of Argentina’s crisis of 2001–2002? What lessons were learned and what steps were taken to normalize Argentina’s economy? Infrastructure weakness was one of the causes of the emerging market crisis in Thailand in 1997. Define infrastructure weakness, and explain how it could affect a country’s exchange rate. Name the four main types of transactions from which transaction exposure arises. What are the major differences in translating assets between the current rate method and the temporal method?
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