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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DD Center Strike 12) Calls/Puts 80 Calls Ticker Bid 21-Jan-22 (0d); CSize 100; R.26; IFwd 216.06 5.80 1 TGT 1/21/22 C210 2) TGT 1/21/22 C212.5 3) TGT 1/21/22 (215 4 TGT 1/21/22 C217.5 5) TGT 1/21/22 C220 3.65 1.77 56 15 10 Puts Calls 10.00 4.60 1.76 .62 Ask 7.40 6.10 2.28 .89 .26 19 Term Structure 1) Moneyness 21.60 13.80 8.65 5.15 2.95 Last 18-Feb-22 (28d); CSize 100; IDiv .78 USD; R .26; IFwd 215.32 TGT 2/18/22 C200 7) TGT 2/18/22 C210 17.55 20.00 10.25 4.90 TGT 2/18/22 C220 TGT 2/18/22 C230 100 TGT 2/18/22 C240 1.96 .73 18-Mar-22 (56d); CSize 100; IDiv .78 USD; R.26; IFwd 215.36 11) TGT 3/18/22 C200 20.15 12) TGT 3/18/22 C210 13.45 130 TGT 3/18/22 C220 8.35 14 TGT 3/18/22 C230 4.85 15) TGT 3/18/22 C240 2.70 7.35 6.65y 2.10 .80 21 28.50y 10.80 5.15 1.98 .72 29.00y 14.25 9.65 5.10 2.85 IVM 118.18 130.35 66.42 64.54 60.19 37.18 29.19 27.75 27.49 28.22 35.07 32.58 31.34 31.07 31.08 Volm Strike Puts Ticker Bid 21-Jan-22 (0d); CSize 100; R 26; IFwd 216.06 .18 44 89 1.96 3.90 Ask .31 .59 5…
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