Question
In: Operations Management
In order to take out a loan, you are required to put up some type of collateral. You decide to offer 1,000 shares of your ZG Corp
In order to take out a loan, you are required to put up some type of collateral. You decide to offer 1,000 shares of your ZG Corp. stock which is valued at $100 per share. You are concerned that the stock price will increase to $125 before you repay the loan and the lender will sell your shares of stock for a profit. How could you manage this risk using a financial derivative?
Solutions
Expert Solution
I can manage the risk of stock price increasing to $125 before I repay the loan by ensuring to enter into a derivative contract and buying a forward, future or an options derivative contract to protect myself from the value of stock going up and ensure that the profits generated from the difference in the stock price from $100 to $125 is realised by myself. This can happen if I buy a forward, future or options derivative contract wherein I will be insured against the price movements. I will have to pay a premium or some fee to enter into that derivative contract but I will get benefit of the price fluctuation and the price difference will be realised by myself through this derivative contract.
keosha answered 2 years agoRelated Solutions
In order to take out a loan, you are required to put up some type of...
In order to take out a loan, you are required to put up some
type of collateral. You decide to offer 1,000 shares of your ZG
Corp. stock which is valued at $100 per share. You are concerned
that the stock price will increase to $125 before you repay the
loan and the lender will sell your shares of stock for a profit.
How could you manage this risk using a financial derivative?
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Volume (100s)
Price
Volume (100s)
Price
2
$0.74
4
$0.81
2
$0.72
5
$0.85
3
$0.70
3
$0.88
7
3
10
$0.65
$0.60
$0.01
8
2
2
$0.90
$0.95
$0.99
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