Question

In: Finance

Imagine that you are holding 5,500 shares of stock, currently selling at $50 per share. You...

Imagine that you are holding 5,500 shares of stock, currently selling at $50 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January call options with a strike price of $55 are selling at $2, and January puts with a strike price of $45 are selling at $3. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $41, $50, $61? What will the value of your portfolio be if you simply continued to hold the shares?

Stock Prices:
Portfolio Value $41 $50 $61
If collar is used ? ? ?
if you continued to hold the shares ? ? ?

Solutions

Expert Solution



Related Solutions

Imagine that you are holding 6,200 shares of stock, currently selling at $30 per share. You...
Imagine that you are holding 6,200 shares of stock, currently selling at $30 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January...
Imagine that you are holding 6,800 shares of stock, currently selling at $60 per share. You...
Imagine that you are holding 6,800 shares of stock, currently selling at $60 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January...
Imagine that you are holding 5,400 shares of stock, currently selling at $45 per share. You...
Imagine that you are holding 5,400 shares of stock, currently selling at $45 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January...
Imagine that you are holding 5,600 shares of stock, currently selling at $55 per share. You...
Imagine that you are holding 5,600 shares of stock, currently selling at $55 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January...
Imagine that you are holding 5,600 shares of stock, currently selling at $55 per share. You...
Imagine that you are holding 5,600 shares of stock, currently selling at $55 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January...
Imagine that you are holding 5,400 shares of stock, currently selling at $45 per share. You...
Imagine that you are holding 5,400 shares of stock, currently selling at $45 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January...
Suppose that you sell short 200 shares of Xtel, currently selling for $50 per share, and...
Suppose that you sell short 200 shares of Xtel, currently selling for $50 per share, and give your broker $6,000 to establish your margin account. a. If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $56; (ii) $50; (iii) $45? Assume that Xtel pays no dividends. b. If the maintenance margin is 25%, how high can Xtel’s price rise before...
Suppose that you sell short 200 shares of Xtel, currently selling for $50 per share, and...
Suppose that you sell short 200 shares of Xtel, currently selling for $50 per share, and give your broker $6,000 to establish your margin account. a. If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $56; (ii) $50; (iii) $45? Assume that Xtel pays no dividends. b. If the maintenance margin is 25%, how high can Xtel’s price rise before...
Suppose that ZX Inc. is currently selling at $50 per share. You buy 200 shares, using...
Suppose that ZX Inc. is currently selling at $50 per share. You buy 200 shares, using $5,000 of your own money and borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 5%. What is the rate of return on your margined position (assuming again that you invest $5,000 of your own money) if ZX Inc. is selling after one year at (i) $54, (ii) $50, (iii) $46?
Suppose that ZX Inc. is currently selling at $50 per share. You buy 200 shares, using...
Suppose that ZX Inc. is currently selling at $50 per share. You buy 200 shares, using $5,000 of your own money and borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 5%. Suppose that you sell short 400 shares of ZX Inc., currently selling for $50 per share, what will your rate of return be after one year if ZX Inc. stock is selling at (i) $54, (ii) $50, (iii) $46? Assume...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT