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Example 1: Hedging with a Put Option (1) Suppose that an investor owns 100 shares of ABC stock currently priced at $80. The investor
Example 1: Hedging with a Put Option (1) Suppose that an investor owns 100 shares of ABC stock currently priced at $80. The investor is worried about the possibility of a drop in share price over the next three months and is contemplating purchasing put options with a strike price of $80 to hedge this risk. Compute the following: Example 1: Hedging with a Put Option (III) . (5) The profit on the unhedged position if the stock price in three months is $60. (6) The profit on the unhedged position if the stock price in three months is $40. (7) The profit for a hedged stock position if the stock price in three months is $60, the strike price on the put is $80, and the put premium is $8.00. (8) The profit for a hedged stock position if the stock price in three months is $40, the strike price on the put is $80, and the put premium is $8.00.
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