Fred's Quandary: 'Ib Hedge or Not to Hedge A little more than it] months ago, Fred Weaver, a mortgage banker in Phoenix, bought Silt} shares of stock at $41] per share. Since then, the price of the stock has risen to STE per share. It is now near the end of the year, and the market is starting to weaken. Fred feels there is still plenty of play left in the stock but is afraid the tone of the market will be detrimental to his position. His wife, Denise, is taking an adtdt education course on the stock market and has just learned about put and call hedgm. She suggests that he use puts to hedge his position. Fred is intrigued by the idea, which he discusses with his broker, who advises him that the needed puts are indeed available on his stock. Specically, he can buy 3month puts, with $15 strike prices, at a cost of $55!] each (quoted at 5.50). |Questions a. Given the circumstances surrounding Fred's current investment position, what benefits could be derived from using the puts m a hedge device? 'What would be the major drawback? b. 'What will Fred's minimum profit be if he buys 3 puts at the indicated option price? How much would he make if he did not hedge but instead sold his stock immediately at a price of $?5 per share? c. Assuming Fred uses 3 puts to hedge his position, indicate the amount of prot he will generate if the stock moves to $10!] by the expiration date of the puts. 1What if the stock drops to $5!) per share? d. Shotdd Fred use the puts as a hedge? Explain. Under what conditions would you urge him not to use the puts as a hedge