a.
To compute: The cost to purchase the desired put option when traded.
Introduction:
Put option: It is a contract in which certain right is given to sell the underlying asset to any person or organization at a price fixed irrespective of changes in market prices during the agreed period of time.
b.
To compute: The cost of the protective put portfolio as per the given information.
Introduction:
Protective put: It is also termed as married put. A strategy in which the investor buys shares of a stock along with sufficient put options required to cover the shares can be termed as protective put.
c.
To analyze: The payoff of the portfolio and the cost of establishing the portfolio.
Introduction:
Payoff: In financial terminology, payoff refers to the
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Investments, 11th Edition (exclude Access Card)
- You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $110 at year-end. XYZ currently sells for $110. Over the next year, the stock price will either increase by 5% or decrease by 5%. The T-bill rate is 4%. Unfortunately, no put options are traded on XYZ Company. Required: a. How much would it cost to purchase if the desired put option were traded? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Cost to purchase b. What would be the cost of the protective put portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Cost of the protective put portfolioarrow_forwardYou would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $210 at year-end. XYZ currently sells for $210. Over the next year, the stock price will either increase by 10% or decrease by 10%. The T-bill rate is 4%. Unfortunately, no put options are traded on XYZ Company. Required: a. How much would it cost to purchase if the desired put option were traded? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What would be the cost of the protective put portfolio?arrow_forwardSuppose XYZ stock pays no dividends and has a current price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year eective annual interest rate is 10%. (a) Graph the payo and prot diagrams for a forward contract on XYZ stock with a forward price of $55. (b) Is there any advantage to investing in the stock or the forward contract? Why? (c) Suppose XYZ paid a dividend of $2 per year and everything else stayed the same. Now is there any advantage to investing in the stock or the forward contract? Why?arrow_forward
- You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $240 at year-end. XYZ currently sells for $240. Over the next year, the stock price will either increase by 7% or decrease by 7%. The T-bill rate is 3%. Unfortunately, no put options are traded on XYZ Company. Required: a. How much would it cost to purchase if the desired put option were traded? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What would be the cost of the protective put portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forwardFinancearrow_forwardCurrently you own no stock or options. Today's data for Green Corporation, where the call and put have the same exercise price and expire in one year: Strike Price Put Price Call Price Stock Price $32.50 $2.85 $1.65 $30.00 a. If you construct a protective put strategy, which securities will you buy or sell, and what is your total investment today? If the stock price is $20 on the expiration date, what will be the value of your portfolio (payoff) on that day, and your net profit? b. If you construct a covered call strategy, which securities will you buy or sell, and what is your total investment today? If the stock price is $45 on the expiration date, what will be the value of your portfolio (payoff) on that day, and your net profit?arrow_forward
- Company SilverBrigde has a stock price of €75. SilverBridge is exposed to a competitive risk which has 20% changes to decrease the value of the stock by 30% within the next year. It is possible to buy a put with a strike price of €70 and a maturity of one year, for €1. An investor considers buying the stock and a put option to mitigate risks.What is the potential downside (maximum loss potential in €) related to owning the stock for a year, related to the risk factor, if the investor does buy the option?arrow_forwardYou think that there is an arbitrage opportunity on the market. The current stock price of Wesley corp. is $20 per share. A one- year put option on Wesley corp. with a strike price of $18 sells for $3.33, while the identical call sells for $7. The one-year risk- free interest rate is 8%. Assuming that the put option is fairly priced, compute the fair price of the call option and explain what you must do to exploit this arbitrage opportunity and what will be your gain.arrow_forwardConsider a market where the assumptions behind the Black-Scholes model hold. A non-dividend paying share is currently priced at $300. A put option is available on the share with a strike price of $320 and one year to expiry. Volatility of 15% and the risk-free rate is 5% per annum. What would be the fair price of the put option.arrow_forward
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