Discuss the Relative Advantages and Disadvantages in Using Either Options

question 57

Essay

Discuss the relative advantages and disadvantages in using either options or futures to hedge an exposure.(For simplicity, assume that the contracts are written on the same quantity of the same asset and that the contracts expire at the same time.Also assume that the strike price and futures price are identical.)

---

Definitions:

FIFO Method

First-In, First-Out, an inventory valuation method where the costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold.

Conversion Costs

The costs incurred in the process of converting raw materials into finished goods, typically including labor and overhead expenses.

Brazing Department

A specific department in manufacturing where brazing, a process of joining metals using a filler metal, takes place.

FIFO Method

First In, First Out method; an inventory valuation approach where goods produced or acquired first are sold or used first.