• Consider two different portfolios:

  • Portfolio A contains XYZ stock trading currently at 50.

  • Portfolio B contains XYZ stock and a European put option written on one XYZ stock. The put option currently costs 3, has a strike price of 50 and an expiration date in 3 months.

• Compute the returns on Portfolio A and Portfolio B in three months time if:

  • XYZ price decreases to 30

  • XYZ price increases to 70

• Examine these returns and reflect on the role that the put option plays in Portfolio B. (7 marks)