28 lines
1.7 KiB
Plaintext
28 lines
1.7 KiB
Plaintext
211
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Chapter 10
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Accepting exposure
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Brokerages and exchanges treat the acceptance of exposure by counter -
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parties in a very different way from counterparties who want to gain expo-
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sure. There is a good reason for this: although an investor gaining exposure
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has an option to transact in the future, his or her counterparty—an investor
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accepting exposure—has a commitment to transact in the future at the sole
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discretion of the option buyer. If the investor accepting exposure does not
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have the financial wherewithal to carry out the committed transaction, the
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broker or exchange is on the hook for the liability.
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1
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For example, an investor selling a put option struck at $50 per share
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is committing to buy the stock in question for $50 a share at some point
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in the future—this is the essence of accepting exposure. If, however,
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the investor does not have enough money to buy the stock at $50 at
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some point in the future, the investor’s commitment to buy the shares is
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economically worthless.
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To guard against this eventuality, brokers require exposure-accepting
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investors to post a security deposit called margin that will fully cover the fi-
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nancial obligation to which the investor is committing. In the preceding ex-
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ample, for instance, the investor would have to keep $5,000 (= $50 per share ×
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100 shares/contract) in reserve and would not be able to spend those reserved
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funds for stock or option purchases until the contract has expired worthless.
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Because of this margin requirement, it turns out that one of our strat-
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egies for accepting leverage—short puts—always carries with it a loss lev-
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erage of –1.0—exactly the same as the loss leverage of a stock. Think about
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it this way: what difference is there between using $50 to buy a stock and |