Question
In: Finance
Hedging with a put option Suppose that an investor owns one share of ABC stock currently...
Hedging with a put option
Suppose that an investor owns one share of ABC stock currently priced at $30. The investor is worried about the possibility of a drop in share price over the next three months and is contemplating purchasing put options to hedge this risk. The put option is having a strike of $30 and premium of $1.50. Compute the profit of a
a. un-hedged position if the stock price in three months is $25
b. *un-hedged position if the stock price in three months is $35
c. hedged position if the stock price in three months is $25
d. *hedged position if the stock price in three months is $35
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
jeff jeffy answered 1 year agoRelated Solutions
1. [Valuing a Put Option] Suppose a stock is currently trading for $60, and in one...
1. [Valuing a Put Option] Suppose a stock is currently trading
for $60, and in one period will either go up by 20% or fall by 10%.
If the one-period risk-free rate is 3%, what is the price of a
European put option that exprires in one period and has an exercise
price of $60?
2. Suppose the uncertainty involves two possible states (0- =
1,2) with equal probability 0.5. The investment A produces a
state-contingent rate of return 3%...
An investor is considering buying a put option for stock ABC with the following parameters: Exercise...
An investor is considering buying a put option for stock ABC
with the following parameters:
Exercise price of the put option is $170, initial stock price
$165, put option price $8.
A. Define payoff and profit function and provide payoff and
profit formulae for the put option buyer at maturity with respect
to stock price at expiration.
B. Define payoff and profit function and calculate the payoff
and profit for a protective put position at maturity when the stock
price...
An investor is considering buying a put option for stock ABC with the following parameters: Exercise...
An investor is considering buying a put option for stock ABC
with the following parameters:
Exercise price of the put option is $170, initial stock price
$165, put option price $8.
A. Define payoff and profit function and provide payoff and
profit formulae for the put option buyer at maturity with respect
to stock price at expiration.
B. Define payoff and profit function and calculate the payoff
and profit for a protective put position at maturity when the stock
price...
An investor is considering buying a put option for stock ABC with the following parameters: Exercise...
An investor is considering buying a put option for stock ABC
with the following parameters:
Exercise price of the put option is $170, initial stock price
$165, put option price $8.
A. Define payoff and profit function and provide payoff and
profit formulae for the put option buyer at maturity with respect
to stock price at expiration.
B. Define payoff and profit function and calculate the payoff
and profit for a protective put position at maturity when the stock
price...
Suppose an investor sells (writes) a put option. What will happen if the stock price on...
Suppose an investor sells (writes) a put option. What will
happen if the stock price on the exercise date exceeds the exercise
price?
answer choices
a.The seller will need to deliver stock to the owner of the
option.
b.The seller will be obliged to buy stock from the owner of the
option.
c.The owner will not exercise his option.
d.The option will extend for nine more months.
An investor buys a butterfly spread on COPCO stock by buying one put option with an...
An investor buys a butterfly spread on COPCO stock by buying one
put option with an exercise price of $50 for $1, buying one put
option with an exercise price of $60 for $7 and selling two put
options with an exercise price of $55 for $3 each. (above relates
to the 3 questions below) (Please show workings)
1. If COPCO’s expiration date stock price is $48, the investor’s
profit is: (a) $5 (b) -$2 (c) $1 (d) -$7.
2....
A put is currently being traded on an underlying security. An investor buys a put option...
A put is currently being traded on an underlying security. An
investor buys a put option for $7 per share. The strike price is
$100 per share and the option expires in three months.
a) What is the profit of this trade per share if in three months
the price of the
underlying security is $117 per share?
b) How does you answer to part a) change if the price of the
underlying security in
three months is $99 per...
An investor owns 5,000 shares of stock AB, which is currently trading at $100 per share....
An investor owns 5,000 shares of stock AB, which is currently
trading at $100 per share. The investor is fearful of a sharp
decrease of the stock price. He decides to buy 50 December 95 put
option at a price of $3, paying $15,000. Note: Each put
option contract provides for the right to sell 100 shares of stock.
December 95 put option means that the strike price of the put is 95
and it matures in December.
If IBM stock...
An investor owns 5,000 shares of stock AB, which is currently trading at $100 per share....
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trading at $100 per share. The investor is fearful of a sharp
decrease of the stock price. He decides to buy 50 December 92 put
option at a price of $3, paying $15,000. Note: Each put option
contract provides for the right to sell 100 shares of stock.
December 92 put option means that the strike price of the put is 92
and it matures in December.
If IBM...
Suppose that an investor is analysing one European call option on an underlying stock with the...
Suppose that an investor is analysing one European call option
on an underlying stock with the following characteristics: Option
price is $5, the current stock price is $95, the strike price =
$100, and the expiry date of the option is in 2 months. Which of
the following statements is incorrect?
Select one:
a. The break-even price for taking a long position in this call
option is $100.
b. Buying the call option will give the investor some advantages
over...
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