Suppose that you are a derivatives trading expert with three years of experience at Interactive Brokers Group (IBG), an established leader in brokerage services. Along with normal brokerage activities, IBG has also been providing professional fund management services. You have been given the responsibility of handling the trading accounts of some individual clients. Due to the lack of time and expertise, these clients do not directly trade in stock and derivatives markets. Instead, they trust a brokerage company's trading expertise that provides them with customized solutions for hedging equity price risks. The management requires you to complete the following tasks, utilizing your in-depth knowledge of the markets and your derivatives trading expertise.

 (a) Evaluate the relative pros and cons of in-the-money and out-of-the-money options.

(b) One of your clients, Mr Alex Walker is holding a July American call option that is very deep-in-the-money. He wishes to exercise it now and cash in on his winnings. Assess whether this is a wise move for him to make and justify your recommendation.

Answer rating: 100% (QA)

a Evaluate the relative pros and cons of inthemoney and outofthemoney options Inthemoney options Pros Higher probability of expiring in the money High... View the full answer