Chapter 10. Options and Futures

In modern finance, the option theory (including futures and forwards) and its applications play an important role. Many trading strategies, corporate incentive plans, and hedging strategies include various types of options. For example, many executive incentive plans are based on stock options. Assume that an importer located in the US has just ordered a piece of machinery from England with a payment of £10 million in three months. The importer has a currency risk (or exchange rate risk). If the pound depreciates against the US dollar, the importer would be better off since he/she pays less US dollars to buy £10 million. On the contrary, if the pound appreciates against the US dollar, then the importer would suffer ...

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