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Louis, a portfolio manager, has just purchased a stock at $1,000 per share which he believes to have promising prospect. To protect against losses, Louis
Louis, a portfolio manager, has just purchased a stock at $1,000 per share which he believes to have promising prospect. To protect against losses, Louis plans to purchase an European put option on the stock for $60, with exercise price $950, and six-month time to expiration.
Analyze this hedging strategy by drawing the profit diagram for the stock-plus-put positions for various values of the stock in six months. (10 marks)
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