Tommy is a loyal shareholder of HSBC. He has been holding one share of HSBC common...
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Tommy is a loyal shareholder of HSBC. He has been holding one share of HSBC common stocks for more than 10 years. The recent issue of the bank laundering money for Mexico's drug lords upset Tommy very much. He worries that over the next few months, the stock price and value of his investment in HSBC might decline. The current price of HSBC common stock is $65. a Tommy intends to hedge the risk with one of the following three option strategies, which will expire simultaneously in the future. Complete a table similar to the following for each of the option strategies listed below. Expiration date Expiration date HSBC price option payoff (S) (S) 30 35 40 45 50 55 60 65 70 75 80 Initial option Combined terminal premium (S) position value (S) Option strategies: i. Write a call option of HSBC with an exercise price of $65 and a premium of $4. (6 marks) ii. Buy a put option of HSBC with an exercise price of $65 and a premium of $2. (6 marks) iii. Long straddle: purchase one call option and one put option of HSBC with the same exercise price of $65. The premium for the call and put option is $4 and 52, respectively. (9 marks) In calculating the combined terminal position value, ignore the time differential between the initial option expense/receipt and the terminal payoff. Tommy is a loyal shareholder of HSBC. He has been holding one share of HSBC common stocks for more than 10 years. The recent issue of the bank laundering money for Mexico's drug lords upset Tommy very much. He worries that over the next few months, the stock price and value of his investment in HSBC might decline. The current price of HSBC common stock is $65. a Tommy intends to hedge the risk with one of the following three option strategies, which will expire simultaneously in the future. Complete a table similar to the following for each of the option strategies listed below. Expiration date Expiration date HSBC price option payoff (S) (S) 30 35 40 45 50 55 60 65 70 75 80 Initial option Combined terminal premium (S) position value (S) Option strategies: i. Write a call option of HSBC with an exercise price of $65 and a premium of $4. (6 marks) ii. Buy a put option of HSBC with an exercise price of $65 and a premium of $2. (6 marks) iii. Long straddle: purchase one call option and one put option of HSBC with the same exercise price of $65. The premium for the call and put option is $4 and 52, respectively. (9 marks) In calculating the combined terminal position value, ignore the time differential between the initial option expense/receipt and the terminal payoff.
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Heres a table showing the combined terminal position value for each of the option strategies Option ... View the full answer
Related Book For
Business Statistics A Decision Making Approach
ISBN: 9780133021844
9th Edition
Authors: David F. Groebner, Patrick W. Shannon, Phillip C. Fry
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