Question
Johnny just purchased a stock index fund currently selling at $2,400 per share. To protect against potential losses from this investment, he purchased an at-the-money
Johnny just purchased a stock index fund currently selling at $2,400 per share. To protect against potential losses from this investment, he purchased an at-the-money European put option on this fund for $120, with exercise price $2,400, and 3-month time to expiration. His financial advisor Sammy points out that Johnny is spending too much on the put option and she notes that another 3-month puts with strike prices of $2,340 cost only $90, and suggests that Johnny should buy this cheaper put option instead.
1. Analyze Johnnys and Sammys strategies separately by constructing the profit matrices for their strategies for various values of the stock fund in three months.
2. Comparing the two strategies, which one is better ? And in what sense ?
3.Which strategy entails greater systematic risk ?
For question 1 please give me the formula expanasion~
Thanks
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