ErenCo is an up-and-coming stone quarry company. A recent report, reflecting the general sentiment of all market
Question:
ErenCo is an up-and-coming stone quarry company. A recent report, reflecting the general sentiment of all market participants, projected the following prices and probabilities for ErenCo stock on Aug. 16:
Probability
1/3
1/2
1/6
Stock Price
$15
$10
$6
For each of the following questions, be sure to show all of your work.
Jeffrey Hotshot runs a large mutual fund that owns a lot of ErenCo's stock. He is concerned with maintaining the value of his investment in these volatile times. He plans on selling call options and using the proceeds to exactly offset what he plans on spending to buy put options. In this way he wants to ensure that he will always be able to sell his stock for at least $10 per share.
At what strike price will he have to sell his call options? Assume his expectations are the same as the market's, and that he will transact the same number of puts and calls.