F and some over-the-counter European options (both call and put) on Stock X. These options in the same You are Dr. Shetty's investment advisor. He has given you $10 million to invest in a portfolio of Stock X portfolio can be a good hedge. Currently Stock X is trading at $200 per share. Before you decide on an investment strategy, you wanted to know what the future holds for Stock X. Therefore, you ask one of Dr. Shetty's star MBA student, Jordan Work, to project the various economic states, probability of each state, and the stock price under each scenario using extensive historical data and opinion of several experts. For example, State 1 could be deep recession and State 2 mild recession, etc. His finding is below: Performance of Stock X under various states: State 1 Probability 0.05 State 2 0.10 State 3 State 4 0.20 Stock Price 0.30 State 5 0.20 State 6 State 7 0.10 0.05 140 160 180 200 225 250 350 Options (European) on Stock X: Strike Price Premium Put Option A Call Option B Put Option C 180 $0.90 250 $23.10 220 Colver solver $22.00 a. After examining the option prices, you suspect a good strategy might be to buy one put and one call option for each share of the stock purchased. What are the mean and standard deviation of returns for a portfolio consisting of shares of Stock X and Put Option A, and Call Option B? (Each one share) b. Assuming Dr. Shetty wishes to create a portfolio consisting of Stock X and the three options (A, B, and C). If his goal is to minimize the standard deviation of the portfolio return, what is the optimal portfolio (how much in $ invested in each asset?) All 10 million is invested. Assume fractional numbers of stock shares and options can be purchased. Also, assume the number of options purchased need not equal the number of shares of the stock purchased. How many shares of Stock X and how many of each option does this portfolio correspond to? c. Suppose the short selling is permitted - that is, variables can take negative values. Now solve for least risky (minimum standard deviation of return) portfolio. - May - мау want to second tab have t) options, check integer box 9

F and some over-the-counter European options (both call and put) on Stock X. These options in the same You are Dr. Shetty's investment advisor. He has given you $10 million to invest in a portfolio of Stock X portfolio can be a good hedge. Currently Stock X is trading at $200 per share. Before you decide on an investment strategy, you wanted to know what the future holds for Stock X. Therefore, you ask one of Dr. Shetty's star MBA student, Jordan Work, to project the various economic states, probability of each state, and the stock price under each scenario using extensive historical data and opinion of several experts. For example, State 1 could be deep recession and State 2 mild recession, etc. His finding is below: Performance of Stock X under various states: State 1 Probability 0.05 State 2 0.10 State 3 State 4 0.20 Stock Price 0.30 State 5 0.20 State 6 State 7 0.10 0.05 140 160 180 200 225 250 350 Options (European) on Stock X: Strike Price Premium Put Option A Call Option B Put Option C 180 $0.90 250 $23.10 220 Colver solver $22.00 a. After examining the option prices, you suspect a good strategy might be to buy one put and one call option for each share of the stock purchased. What are the mean and standard deviation of returns for a portfolio consisting of shares of Stock X and Put Option A, and Call Option B? (Each one share) b. Assuming Dr. Shetty wishes to create a portfolio consisting of Stock X and the three options (A, B, and C). If his goal is to minimize the standard deviation of the portfolio return, what is the optimal portfolio (how much in $ invested in each asset?) All 10 million is invested. Assume fractional numbers of stock shares and options can be purchased. Also, assume the number of options purchased need not equal the number of shares of the stock purchased. How many shares of Stock X and how many of each option does this portfolio correspond to? c. Suppose the short selling is permitted - that is, variables can take negative values. Now solve for least risky (minimum standard deviation of return) portfolio. - May - мау want to second tab have t) options, check integer box 9

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter15: International Corporate Governance And Control

Section: Chapter Questions

Problem 2IEE

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