Alternatives Flashcards
1
Q
What factors affect the price of an option?
A
- Market value of the underlying
- Strike price
- Time to expiry
- Expected volatility
- Type of option: American v European
2
Q
What derivatives could be used to hedge against a fall in an asset?
A
- Spread betting
- Contracts for different
- Put option
- Short ETP
- Covered warrant
3
Q
Identify what type of options would be used to hedge against a fall in the price of an asset, and how it achieves this.
A
- Put option on underlying
- Gives right to sell underlying
- At fixed, pre-determined price
- In set time period
- No obligation
- Gain on option offsets loss on underlying
4
Q
What are the potential drawbacks of investing in a hedge fund?
A
- May be illiquid
- Strategy may not be transparent
- Usually, high minimum investment
- High charges/performance fees
- Manager’s strategy may not work
- No FSCS protection
5
Q
What are the benefits of structured products?
A
- Wide range of underlying asset combinations available
- No fund manager bias
- Return is explicitly stated
- Risk/return fixed and transparent
- Index averaging may enhance returns in falling markets
6
Q
What are the drawbacks of structured products?
A
- Returns are limited/may miss out on strongly rising market
- Autocall features mean average maturity is usually less than product term
- Maturity in falling markets may reduce returns
- Callable products add uncertainty
- Index averaging may dilute returns in rising markets
- Early encashment charges
- Market crashes may mean capital protection barrier is breached
- No participation in dividends
7
Q
What are the benefits of investing in commodities?
A
- Diversification
- Reduce overall portfolio volatility
- Negative correlation to equities & bonds
- Hedge against inflation
- Hedge against political uncertainty
- No CGT to pay on certain assets
8
Q
What are the drawbacks of investing in commodities?
A
- Demand affected by business cycle
- Imbalances in supply & demand can lead to wild price swings
- Storage costs (if held physically)
- No income
- High transaction costs
