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IAG shares currently trade at $5.60. A fund manager is holding a large number of IAG shares in an investment portfolio and wishes to protect
IAG shares currently trade at $5.60. A fund manager is holding a large number of IAG shares in an investment portfolio and wishes to protect the value of the investment. The manager buys a put option with an exercise price of $5.40 per share and pays a premium of $0.25 per share.
- Describe a put option and explain the premium and exercise price. (4 marks)
- By entering into this option strategy, explain whether the fund manager will exercise the option if the spot price is above or below the exercise price, then explain how this will protect the value of the investment. (4 marks)
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