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5. Hedging with stock options Suppose that Newark Pension Fund purchased Omegaco stock at the market price of $130 per share, and to hedge against
5. Hedging with stock options Suppose that Newark Pension Fund purchased Omegaco stock at the market price of $130 per share, and to hedge against what they think will be a temporary decline in Omegaco's stock price, Newark sells call options on Omegaco stock with an exercise price of $128 per share for a premium of $3 per share. Assume that Newark Pension Fund sells its shares at the expiration date no matter the market price at the time. Use the previous information to determine the prices Newark Pension Fund will sell Omegaco's stock for, as well as the profit they earn, at each given expiration date market price. (Hint: Assume the call option will be exercised only if the expiration date market price is greater than or equal to the exercise price plus the call premium.) Market Price of Omegaco as of the Expiration Date (per share) Price at which Newark Pension Fund Sells Omegaco Stock (per share) Call Option Premium Initial Omegaco Stock Purchase Price (per share) Profit (per share) (per share) $ $ $125 $3 $130 $ $ $126 $3 $130 $127 $ $3 $130 $ $128 $ $3 $130 $ $129 $ $3 $130 $ $ $130 $3 $130 $ $ $131 $3 $130 $ $132 $ $3 $130 $ $133 $ $3 $130 $ $134 $ $3 $130 $
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