1-Create a scenario where an investor would benefit from using option contracts to minimize risk.
The option in the stock investment seems to have a lot of advantages like it protects the investor from suffering from a huge loss, trading off into long term and the foremost advantage is the buying the stock with calls that is having margin money much lower than that of the actual price of the stock.
Considering, an investor want to buy 100 share costing $20each, so he/she will have to pay $2000 for it, going through the call option he has to pay 20 calls like around $4000 only for the whole 100 shares of $20 each.
Moreover, as mostly being observed in some cases, long term investors continue to hold the stock even in $1000 loss, which is not the case with this option method, it won’t allow to have it for so much loss is one of the bigger advantage of it and as a result lowering the risk exposure to an extent.
2-Evaluate how models used for valuing stock options can be adapted to other underlying assets such as stock indexes.
Models being used for valuing stocks options can be adapted by many of its advantages. The models being used for stock options had a huge return on the past which can be observed having a proper research in 1980. Besides this, only a small amount of risk exposure serves a lot to trade off. Besides this, last but not the least is the protection from being the huge sufferers. This all circumstances proved that the model used for valuing stock options is much better than those of underlying assets like the stock indexes and so on.
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