An insider purchased a stock prior to the IPO for $10 a share. Once public, the stock runs up to $55 a share but the insider cannot sell the stock for a year. Since put and call options exist, the individual decides to construct a collar for protection from a possible decline in the price of the stock. Information concerning the options is as follows:

Strike price Market price Put $55 $3.00 Call $55 $3.00

a) Describe the position you establish.

b) Verify that the position achieves its objective by determining the profit/ loss profile on the collar if the price of the stock rises to $60, remains at $55, or declines to $40.

c) Why does the position work (i.e., why does it achieve its objective)?