Finance Test

Question. In the case the price of BP stock is. Euro , Mr. Comparing the coverage provided by both derivatives , both of them protect Mr.

Mr. Smith is going to receive 50,000 shares of BP as an inheritance. The current price of BP stock is 5 euro, but Mr. Smith is convinced the price of going to drop in the near future. Unfortunately, he will only receive the inheritance at the end of the year.

Mr. Smith is considering to use derivatives to protect himself from this reduction in the BP stock prices. He is thinking about Forwards or Options.

A Forward contract, with 5 euro future price and 31/12 maturity

Compare the type of coverage provided by the two derivatives, in terms of cost and financial outcome in these two scenarios:

In the case Mr. Smith uses a Forward, with future price equal to 5 euro, the value of his holdings is always going to be 250,000 (50,000*5), regardless of the actual price of BP stock at the end of the year (either 4 euro or 5.