A stock currently trades at $100. In one month its price will either be $125, $100, or $75. 1 sell you a call option on this stock, struck at $95, for $11. | hedge my exposure by purchasing A shares, borrowing 1004 - 11 in order to fund the purchase. The simple rate of interest is 12%. (@) What will my profit/loss be in one month? {b) Is it possible for me to completely hedge my exposure? Explain.

A stock currently trades at $100. In one month its price will either be $125, $100, or $75. 1 sell you a call option on this stock, struck at $95, for $11. | hedge my exposure by purchasing A shares, borrowing 1004 - 11 in order to fund the purchase. The simple rate of interest is 12%. (@) What will my profit/loss be in one month? {b) Is it possible for me to completely hedge my exposure? Explain.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 2Q: Two investors are evaluating General Electric’s stock for possible purchase. They agree on the...

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Question

A stock currently trades at $100. In one month its price will either be $125, S100, or $75. I sell you a call option on this stock, struck at $95, for $11.I hedge my
exposure by purchasing A shares, borrowing 100A - 11 in order to fund the purchase. The simple rate of interest is 12%.
(a) What will my profit/loss be in one month?
(b) Is it possible for me to completely hedge my exposure? Explain.

Definition Definition Amount earned or lost on the sale of one or more items is referred to as the profit or loss on that item

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