I Bookmark Show all steps: Chapter 15, Problem 18PS ON Problem Chapter 15 15PS You are attempting to formulate an investment strategy. On the one hand, you think there is great 16PS upward potential in the stock market and would like to participate in the upward move if it materializes, However, vou are not able to afford substantial stock market losses and so cannot 17PS run the risk of a stock market collapse, which you recognize is also possible. Your investment 18PS adviser suggests a protective put position: Buy shares in a market-index stock fund and put options on those shares with three-months until expiration and exercise price of $1,560. The 19PS stock index is currently at $1,800. However, your uncle suggests you instead buy a three-month 20PS call option on the index fund with exercise price $1,680 and buy three-month T-bills with face value $1,680. 21PS a. On the same graph, draw the payoffs to each of these strategies as a function of the stock 22PS fund value in three months. 23PS 24PS b. Which portfolio must require a greater initial outlay to establish? 25PS c. Suppose the market prices of the securities are as follows: 26PS 27PS $1,800 Stock fund T-bill (face value $1,680) 1,620 28PS Call (exercise price $1,680) 240 29PS Put (exercise price $1,560) 12 Chapter 16 Make a table of profits realized for each portfolio for the following values of the stock price in three months: ST = $0, $1,400, $1,600, $1,800, and $1,920. Graph the profits to each portfolio as Chapter 17 a function of ST on a single graph. Chapter 18 Chapter 19 d. Which strategy is riskier? Which should have a higher beta? Chapter 20 Chapter 21 Step-by-step solution Chapter 22 II I Bookmark Show all steps: Chapter 15, Problem 18PS ON Problem Chapter 15 15PS You are attempting to formulate an investment strategy. On the one hand, you think there is great 16PS upward potential in the stock market and would like to participate in the upward move if it materializes, However, vou are not able to afford substantial stock market losses and so cannot 17PS run the risk of a stock market collapse, which you recognize is also possible. Your investment 18PS adviser suggests a protective put position: Buy shares in a market-index stock fund and put options on those shares with three-months until expiration and exercise price of $1,560. The 19PS stock index is currently at $1,800. However, your uncle suggests you instead buy a three-month 20PS call option on the index fund with exercise price $1,680 and buy three-month T-bills with face value $1,680. 21PS a. On the same graph, draw the payoffs to each of these strategies as a function of the stock 22PS fund value in three months. 23PS 24PS b. Which portfolio must require a greater initial outlay to establish? 25PS c. Suppose the market prices of the securities are as follows: 26PS 27PS $1,800 Stock fund T-bill (face value $1,680) 1,620 28PS Call (exercise price $1,680) 240 29PS Put (exercise price $1,560) 12 Chapter 16 Make a table of profits realized for each portfolio for the following values of the stock price in three months: ST = $0, $1,400, $1,600, $1,800, and $1,920. Graph the profits to each portfolio as Chapter 17 a function of ST on a single graph. Chapter 18 Chapter 19 d. Which strategy is riskier? Which should have a higher beta? Chapter 20 Chapter 21 Step-by-step solution Chapter 22