Question

An investor buys a collared stock. The current price of the stock is 200. The collar has strike prices 200 and 210 and is zero cost. The collar expires in 6 months.

The stock pays a dividend of 1 every 3 months. The next dividend is payable in 1 month.

The annual effective risk free interest rate is 4%.

Let S be the price of the stock at the end of 6 months.

Determine the range of S for which the collared stock generates a positive loss

Answer 1

	a	INITIAL INVESTMENT FOR BUYING STOCK	200
	b	Present Value of first dividend after one month=1/(1+(0.04/12))	0.9966777
	c	Present Value of Second dividend after 4 months=1/((1+(0.04/3)	0.9868421
	D=a-b-c	Net Present Value of Investment=	198.02
		Payoff from Buying Put at strike=200
		Payoff=Max.((200-S),0)
		Payoff from Writing CALL at strike=210
		Payoff=Min.((210-S),0)
		THERE WILL BE LOSS IF S IS LESS THAN 202
			S	A	B	C	D=A+B+C	E=D/1.02	F=E-198.02
			Price at expiration	Amount from selling stock	Payoff from Buying Put	Payoff from Writing Call	Total Amount received	Present Value of Total amount	Net Present Value of Gain/(Loss)
			190	190	10	0	200	196.08	-1.94
			191	191	9	0	200	196.08	-1.94
			192	192	8	0	200	196.08	-1.94
			193	193	7	0	200	196.08	-1.94
			194	194	6	0	200	196.08	-1.94
			195	195	5	0	200	196.08	-1.94
			196	196	4	0	200	196.08	-1.94
			197	197	3	0	200	196.08	-1.94
			198	198	2	0	200	196.08	-1.94
			199	199	1	0	200	196.08	-1.94
			200	200	0	0	200	196.08	-1.94
			201	201	0	0	201	197.06	-0.96
			202	202	0	0	202	198.04	0.02
			203	203	0	0	203	199.02	1.00
			204	204	0	0	204	200.00	1.98
			205	205	0	0	205	200.98	2.96
			206	206	0	0	206	201.96	3.94
			207	207	0	0	207	202.94	4.92
			208	208	0	0	208	203.92	5.90
			209	209	0	0	209	204.90	6.88
			210	210	0	0	210	205.88	7.86
			211	211	0	-1	210	205.88	7.86
			212	212	0	-2	210	205.88	7.86
			213	213	0	-3	210	205.88	7.86
jeff jeffy Next > < Previous Related Solutions An investor buys a European call on a share for $5. The current stock price is... An investor buys a European call on a share for $5. The current stock price is $102 and the strike price is $100. (a) Under what circumstances will the investor make a profit (have positive profit) on the expiration date? (b) Under what circumstances will the option be exercised on the expiration date? (c) Please draw a diagram showing how the investor’s profit depends on the stock price on the expiration date. To put it another, draw a diagram showing... Investor buys 200 shares of stock at $27.25 per share. Investor sells the stock after one... Investor buys 200 shares of stock at $27.25 per share. Investor sells the stock after one year. 1. What is the dollar amount of gain and the percent of return if the stock is sold for $32.60 per share? How much does the yield percentage increase to if the stock received a per share dividend of $1.15 during the year? 2. What is the dollar amount of loss and percentage of return if the stock received a per share dividend... An investor is said to take a position in a “collar” if she buys the asset,... An investor is said to take a position in a “collar” if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two options should have the same time to expiration. Suppose Marie wishes to purchase a collar on Riggs, Inc., a non-dividend-paying common stock, with six months until expiration. She would like the put to have a strike price of $34 and the call to have a... An investor is said to take a position in a “collar” if she buys the asset,... An investor is said to take a position in a “collar” if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two options should have the same time to expiration. Suppose Marie wishes to purchase a collar on Riggs, Inc., a non-dividend-paying common stock, with six months until expiration. She would like the put to have a strike price of $34 and the call to have a... 1. An investor purchases 200 shares of ABC stock on margin. The current price of ABC... 1. An investor purchases 200 shares of ABC stock on margin. The current price of ABC stock is $85 per share, the initial margin requirement is 60% and the maintenance margin requirement is 25%. A)   What is the dollar amount of the loan the investor receives from her broker for this margin purchase? B)   How far can the stock price fall before the investor gets a margin call When an investor buys a stock or bond, does the price he is willing to pay... When an investor buys a stock or bond, does the price he is willing to pay depend on whether he intends to resell his investment in 2 years or in 30 years? Why or why not? A trader buys 200 put options on a stock with a strike price of $100 when... A trader buys 200 put options on a stock with a strike price of $100 when the option price is $3 and the stock price is $102. The trader holds the options to the maturity date when the stock price is $107. What is the trader’s net profit or loss? An investor purchases 300 shares of ABC stock on margin. The current price of ABC stock... An investor purchases 300 shares of ABC stock on margin. The current price of ABC stock is $70 per share, the initial margin requirement is 60% and the maintenance margin requirement is 35%. A)   What is the dollar amount of the loan the investor receives from her broker for this margin purchase? B)    How far can the stock price fall before the investor gets a margin call? An investor sells a European put on a share for $8. The current stock price is... An investor sells a European put on a share for $8. The current stock price is $57 and the strike price is $60. (a) Under what circumstances will the investor make a profit (have positive profit) on the expiration date? (b) Under what circumstances will the option be exercised on the expiration date? (c) Please draw a diagram showing how the investor’s profit depends on the stock price on the expiration date. To put it another, draw a diagram showing... An investor sells a European call on a share for $4. The current stock price is... An investor sells a European call on a share for $4. The current stock price is $47 and the strike price is $50. (a) Under what circumstances does the investor make a profit (have positive profit) on the expiration date? (b) Under what circumstances will the option be exercised on the expiration date? (c) Please draw a diagram showing how the investor’s profit depends on the stock price on the expiration date. To put it another, draw a diagram showing... ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions What are the benefits of doing a pilot program before a full scale rollout of a... It is a calm summer day in southeast Iowa at the Ottumwa air traffic control radar... 1. Write a detailed article on Evolution of attacks on the internet & web [your article... Analyze the role of the contingency plan coordinator (CPC) in the scope of preparing a BIA.... Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $500,000. The... LANGUAGE: JAVA Create a New Project called YourLastNameDomainName. Write a DomainName class that encapsulates the concept... On January 1, 2015 $20,000,000 of 20 year bonds were issued with a coupon rate of... ADVERTISEMENT About @ 2020 WizEdu