# risk mgt app of derivatives

All concepts related to the last chap of derivatives especially the diagram and sums related to long call option put option covered call profit protective put etc. Please help.

The best way to start is to write out a table. For example, suppose that today’s stock price is \$50/share, and that you have a (long) put option with a strike of \$50. Create a table with stock prices ranging from, say, \$0/share to \$100/share:

Share Value of Value of Value of

Price Stock Put Option Portfolio

\$0 \$0 \$50 \$50

\$10 \$10 \$40 \$50

\$20 \$20 \$30 \$50

\$30 \$30 \$20 \$50

\$40 \$40 \$10 \$50

\$50 \$50 \$0 \$50

\$60 \$60 \$0 \$60

\$70 \$70 \$0 \$70

\$80 \$80 \$0 \$80

\$90 \$90 \$0 \$90

\$100 \$100 \$0 \$100

If you then plot the value of the portfolio (vertical axis) against the share price (horizontal axis), you’ll see that the shape of the graph looks just like that of a (long) call option.

Try the same with other portfolios:

• Long stock, short call
• Long put, short call
• Short put, long call
• Short stock, short put
• And so on.