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Ms. Smith bought 600 shares of common stock of ABC Ltd. at $100 a share a few years ago. Currently, price per share of ABC's
Ms. Smith bought 600 shares of common stock of ABC Ltd. at $100 a share a few years ago. Currently, price per share of ABC's stock is $120. Suppose she takes a short position of 400 shares at the current price of $120. For the following possible spot price S, on a future time t, calculate capital gain(loss) from her total position in ABC's stock: (i) S, = 80; (ii) S; = 100; (iii) S = 140; Secondly, assuming the probability of each of the three levels of St, is 1/3 and risk is measured by standard deviation, show that going short in 400 shares does not eliminate risk of the long position but it does reduce this risk
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