Options are often used in combination with stocks to reduce risk or to produce other avenues of revenue. Buying protective puts guards against downside risk while allowing for upside potential. Writing covered calls allow investors to earn premium income on a stock they expect to remain stable in price. Wang Foo Ltd. has a current stock price of $100, does not pay dividends, and has an expected standard deviation of .20. Also, the risk-free rate is 6% per year, continuously compounded. The Call option price is $13.85 The Put option Price is $1.19. 1. What will be the payoff and profit of the protective put if the stock price on maturity is $80, $84, $90, $100, $110? 1. What will be the payoff and profit of the covered call if the stock price on maturity is $60, $70, $76, $80, $86?

Options are often used in combination with stocks to reduce risk or to produce other avenues of revenue. Buying protective puts guards against downside risk while allowing for upside potential. Writing covered calls allow investors to earn premium income on a stock they expect to remain stable in price. Wang Foo Ltd. has a current stock price of $100, does not pay dividends, and has an expected standard deviation of .20. Also, the risk-free rate is 6% per year, continuously compounded. The Call option price is $13.85 The Put option Price is $1.19. 1. What will be the payoff and profit of the protective put if the stock price on maturity is $80, $84, $90, $100, $110? 1. What will be the payoff and profit of the covered call if the stock price on maturity is $60, $70, $76, $80, $86?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 8P

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