Question: 3. a) b) Derivative Securities {TOTAL 8 MARKS! Leo knows that the primary purpose of a futures contract is the management of risk exposures. Provide

3. a) b) Derivative Securities {TOTAL 8 MARKS! Leo knows that the primary purpose of a futures contract is the management of risk exposures. Provide more explanation about its key features and also with an example explain pros and cons of futures contacts. (2 marks) Leo bought Amazon shares at 140$ in August and after a couple of weeks it dropped to 136.45$ in Mid of September, so based on this risky and high volatility situation of stock markets, he is looking to control his risk by the option contract. Leo needs your advice on using options contracts. The following table shows a list of options for you to choose from. Further, suppose that each contract contains 100 shares Strike Call premium Moneyness Put premium Moneyness $125 $10.05 $0.01 $130 $3.65 $0.05 $136 $0.7 $0.99 $145 $0.05 $10.48 (i) Please specify the moneyness of the above options. Are they in the money, at the money, or out of the money? (3 marks) \\L Illl n3} b) Leo bought Amazon shares at 140$ in August and after a couple of weeks it dropped to 136.45$ in Mid of September, so based on this risky and high volatility situation of stock markets, he is looking to control his risk by the option contract. Leo needs your advice on using options contracts. The following table shows a list of options for you to choose from. Further, suppose that each contract contains 100 shares Strike Call premium Moneyness Put premium Moneyness $125 $10.05 $0.01 $130 $3.65 $0.05 $136 $0.7 $0.99 $145 $0.05 $10.48 (0 (ii) Please specify the moneyness of the above options. Are they in the money, at the money, or out of the money? (3 marks) Explain the type of risk that Leo is facing and which option is your suggestion to control his risk, provide your reason and explain it.

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