Chapter 21, Problem 2DC

Summary Introduction

Case summary:

10,000 shares of company W owned by U. Due to the announcement of about the change in stock value, he is little conscious about the change in price as the price can be increase or decrease as well. According to U the price would be increased in the near future but for the secured purpose, his broker told him to buy a put which will help him for the future perspective. The broker told him to buy a put and a call option at the same price. In which the put option would help in the situation of drop in price and call option would help him in the situation of improve the value of stock. The different situation leads to the profit and loss. Both the kind of strategy would give the different profits or loss.

Characters in the case:

The characters in the case are as follows:

U, person owns the stock of Company W.

A broker

Adequate information:

The 10,000 stock of Company W which would be owned by U would have the different price in near future as per the announcement and the change is uncertain.

(a) To identify:

The expiring price which is not below the current price as well as closest too.

Summary Introduction

(b) To identify:

The put price.

Summary Introduction

(c) To compute:

The profit on the put.

Summary Introduction

(d) To compute:

The profit on stock.

Summary Introduction

(e) To compute:

The overall profit of protective put.

Summary Introduction

(f) To compute:

The return.