| eBook Problem 14-03 Suppose that an investor holds a share of Sophia common stock, currently valued at $46. She is concerned that over the next few months the value of her holding might decline, and she would like to hedge that risk by supplementing her holding with one of three different derivative positions, all of which expire at the same point in the future: -
A short position in a forward with a contract price of $46. -
A long position in a put option with an exercise price of $46 and a front-end premium expense of $3.33. -
A short position in a call option with an exercise price of $46 and a front-end premium receipt of $5.25. -
Calculate the expiration date value of the investor's combined (i.e., stock and derivative) position and complete the following tables for each of the contract positions below. In calculating net portfolio value, ignore the time differential between the initial derivative expense or receipt and the terminal payoff. Do not round intermediate calculations. Round your answers to the nearest cent. If your answer is zero, enter "0". Use a minus sign to enter negative values, if any. -
A short position in a forward with a contract price of $46. | Expiration Date Sophia Stock Price | Expiration Date Derivative Payoff | Initial Derivative Premium | Net Profit | | $25 | $ | | $ | | $ | | | $30 | $ | | $ | | $ | | | $35 | $ | | $ | | $ | | | $40 | $ | | $ | | $ | | | $45 | $ | | $ | | $ | | | $50 | $ | | $ | | $ | | | $55 | $ | | $ | | $ | | | $60 | $ | | $ | | $ | | | $65 | $ | | $ | | $ | | | $70 | $ | | $ | | $ | | | $75 | $ | | $ | | $ | | -
A long position in a put option with an exercise price of $46 and a front-end premium expense of $3.33. | Expiration Date Sophia Stock Price | Expiration Date Derivative Payoff | Initial Derivative Premium | Net Profit | | $25 | $ | | $ | | $ | | | $30 | $ | | $ | | $ | | | $35 | $ | | $ | | $ | | | $40 | $ | | $ | | $ | | | $45 | $ | | $ | | $ | | | $50 | $ | | $ | | $ | | | $55 | $ | | $ | | $ | | | $60 | $ | | $ | | $ | | | $65 | $ | | $ | | $ | | | $70 | $ | | $ | | $ | | | $75 | $ | | $ | | $ | | -
A short position in a call option with an exercise price of $46 and a front-end premium receipt of $5.25. | Expiration Date Sophia Stock Price | Expiration Date Derivative Payoff | Initial Derivative Premium | Net Profit | | $25 | $ | | $ | | $ | | | $30 | $ | | $ | | $ | | | $35 | $ | | $ | | $ | | | $40 | $ | | $ | | $ | | | $45 | $ | | $ | | $ | | | $50 | $ | | $ | | $ | | | $55 | $ | | $ | | $ | | | $60 | $ | | $ | | $ | | | $65 | $ | | $ | | $ | | | $70 | $ | | $ | | $ | | | $75 | $ | | $ | | $ | | -
For each of the three hedge portfolios, choose the correct graph for the expiration date value of her combined position on the vertical axis, with potential expiration date share prices of Sophia stock on the horizontal axis.      -
Assuming that the options are priced fairly, use the concept of put-call parity to calculate the zero-value contract price (i.e., F0,T) for a forward agreement on Sophia stock. Do not round intermediate calculations. Round your answer to the nearest cent. $ Does this value differ from the $46 contract price used in Part a and Part b? The zero-value contract price -Select-differsdoes not differItem 104 from the $46 contract price because the put and the call prices are -Select-the samenot the sameItem 105 . |
