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(b) The Microsoft stock with ticker MSFT is currently trading at $285.40. The following option and forward contracts are available in the market: Call option
(b) The Microsoft stock with ticker MSFT is currently trading at $285.40. The following option and forward contracts are available in the market: Call option with $300 strike price and premium of $3.70 Put option with $300 strike price and premium of $18.50 Forward contract trading at $300 Required: i. Show what happens to the profit of the buyer and the seller of these contracts if the price moves to (1) $335 and (ii) $260. (5 marks) ii. iii. If you already have a long position in the MSFT stock, how can you shield your portfolio from a potential decline? (3 marks) If you expect high volatility in the market in the following period, how can you use the available contracts to profit? Use examples of price changes to support your answer. (6 marks)
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