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It has been said that, from an investor's perspective, a long position in a call option represents the good half of a long position in a forward contract. Explain what is meant by this statement. Also, describe what the bad

It has been said that, from an investor's perspective, a long position in a call option represents the "good half" of a long position in a forward contract. Explain what is meant by this statement. Also, describe what the "bad half" of the long forward position would have to be for this statement to be true.

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Call options differ from forward contracts in that calls h…View the full answer


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Investment Analysis and Portfolio Management

Investment Analysis and Portfolio Management

ISBN: 978-0538482387

10th Edition

Authors: Frank K. Reilly, Keith C. Brown

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Posted Date: December 17, 2014 10:45:38
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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.

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