You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $109 at year- end. XYZ currently sells for $109. Over the next year the stock price will increase by 12% or decrease by 12%. The T-bill rate is 6%. Unfortunately, no put options are traded on XYZ Co. a. Suppose the desired put option were traded. How much would it cost to purchase? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost to purchase b. What would have been the cost of the protective put portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost of the protective put portfolio
You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $109 at year- end. XYZ currently sells for $109. Over the next year the stock price will increase by 12% or decrease by 12%. The T-bill rate is 6%. Unfortunately, no put options are traded on XYZ Co. a. Suppose the desired put option were traded. How much would it cost to purchase? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost to purchase b. What would have been the cost of the protective put portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost of the protective put portfolio
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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Transcribed Image Text:You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $109 at year-
end. XYZ currently sells for $109. Over the next year the stock price will increase by 12% or decrease by 12%. The T-bill rate is 6%.
Unfortunately, no put options are traded on XYZ Co.
a. Suppose the desired put option were traded. How much would it cost to purchase? (Do not round intermediate calculations and
round your final answer to 2 decimal places.)
Cost to purchase
b. What would have been the cost of the protective put portfolio? (Do not round intermediate calculations and round your final
answer to 2 decimal places.)
Cost of the protective put portfolio
c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put
with X = 109? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put.
(Do not round intermediate calculations and round your final answer to 2 decimal places.)
Portfolio
Buy 0.5 shares
Invest in T-bills
Total
S = 95.92
S = 122.08
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