Imagine that you are holding 5,000 shares of stock, currently selling at $40 per share. You are ready to sell the shares but wouldprefer to put off the sale until next year for tax reasons. If you continue to hold the shares until January, however, you face the risk thatthe stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal ofadditional funds. January call options with a strike price of $45 are selling at $2, and January puts with a strike price of $35 are sellingat $3. Assume that you hedge the entire 5,000 shares of stock.Required:a. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $30?b. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $40?c. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $50?a. Portfolio Valueb. Portfolio Valuec. Portfolio Value

a) $170,000b) $195,000c)$220,000Explanation: Calculate the value of portfolio (net proceeds from the…

Answered: Imagine that you are holding 5,000…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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On July 1, an investor holds 50000 shares of a certain stock. The market price is $50 per share. The investor is interested in hedging against movements in the market over the next month and decides to use the September Mini S&P 500 futures contract. The index is currently 1500 and one contract is for delivery of $50 times the index. The beta of the stock is 1.5. What strategy should the investor follow? Under what circumstances will it be profitable?
Please correct answer and don't use hand rating
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