Myles Houck holds 600 shares of Lubbock Gas and Light. He bought the stock several years ago at S47.61, and the shares are now trading at $77.50. Myles is concerned that the market is beginning to soften. He doesn't want to sell the stock, but he would like to be able to protect the profit he's made. He decides to hedge his position by buying6 puts on Lubbock G&L. The 3-month puts carry a strike price of $77.50 and are currently trading at $2.51 a. How much profit or loss will Myles make on this deal if the price of Lubbock G&L does indeed drop, to S60.00 a share, by the expiration date on the puts? b. How would he do if the stock kept going up in price and reached $91.50 a share by the expiration date? c. What do you see as the major advantages of using puts as hedge vehicles? d. Would Myles have been better off using in-the-money putsthat is, puts with an $86.50 strike price that are trading at $10.67? How about using out-of-the-money puts-say, those with a $70.00 strike price, trading at $0.90? Explain. a. If the price of Lubbock G&L does indeed drop, to $60.00 a share, by the expiration date on the puts, Myles will have a profit (or loss) of$ b. If the stock kept going up in price and reached $91.50 a share by the expiration date, he would have a profit (or loss) of S c. What do you see as the major advantages of using puts as hedge vehicles? Decide whether the statement below is true or false Round to the nearest cent.) (Round to the nearest cent.) The major advantage of a put hedge is that it allows investors to enjoy the upward profit potential, while at the same time protecting the profits already made on the long transaction. In the worst case, the put hedge would only result in the loss of the cost of the put. Is the statement above true or false? (1) Select from the drop-down menu.) d. Wauld Myles have been better off using in-the-money puts that is, puts with an $86.50 strike price that are trading at $10.67? (Select from the drop-down menus.) options are more expensive, and as a hedging device, they are riskier than (3) options (those with strike prices exactly equal to the current market price of the underlying stock) In this case, the cost of 600 puts would be S (4) How about using out-of-the-money puts say, those with a $70.00 strike price, trading at S0.90? Explain. (Select from the drap-down menus.) Even though (7) $(8) But if the stock price drops to $70.00, Myles would lose $7.50 per share in unprotected capital gains. His profit on the out-of-the-money put hedge would be S (1) O True (2) Oin-the-money In the worst case, the investor would lose S (5) compared to only $(6) with an at-the-money option. options are inexpensive, using those options to create a put hedge will leave part of the profits unprotected. For example, using the put with a strike price of $70.00 would cost only Round to the nearest cent.) (3) O in-the-money (4) 1.750.00 O 6,402.00 O 540.00 (5) 1.750.00 ()O 1,750.00 O 6,402.00 O 540.00 (7) O O (8) O 1,750.00 O 6,402.00 O 540.00 in-the-money at-the-money out-of-the-money O 6,402.00 0 540.00 O False O At-the-money O Out-of-the-money O at-the-money O out-of-the-money Myles Houck holds 600 shares of Lubbock Gas and Light. He bought the stock several years ago at S47.61, and the shares are now trading at $77.50. Myles is concerned that the market is beginning to soften. He doesn't want to sell the stock, but he would like to be able to protect the profit he's made. He decides to hedge his position by buying6 puts on Lubbock G&L. The 3-month puts carry a strike price of $77.50 and are currently trading at $2.51 a. How much profit or loss will Myles make on this deal if the price of Lubbock G&L does indeed drop, to S60.00 a share, by the expiration date on the puts? b. How would he do if the stock kept going up in price and reached $91.50 a share by the expiration date? c. What do you see as the major advantages of using puts as hedge vehicles? d. Would Myles have been better off using in-the-money putsthat is, puts with an $86.50 strike price that are trading at $10.67? How about using out-of-the-money puts-say, those with a $70.00 strike price, trading at $0.90? Explain. a. If the price of Lubbock G&L does indeed drop, to $60.00 a share, by the expiration date on the puts, Myles will have a profit (or loss) of$ b. If the stock kept going up in price and reached $91.50 a share by the expiration date, he would have a profit (or loss) of S c. What do you see as the major advantages of using puts as hedge vehicles? Decide whether the statement below is true or false Round to the nearest cent.) (Round to the nearest cent.) The major advantage of a put hedge is that it allows investors to enjoy the upward profit potential, while at the same time protecting the profits already made on the long transaction. In the worst case, the put hedge would only result in the loss of the cost of the put. Is the statement above true or false? (1) Select from the drop-down menu.) d. Wauld Myles have been better off using in-the-money puts that is, puts with an $86.50 strike price that are trading at $10.67? (Select from the drop-down menus.) options are more expensive, and as a hedging device, they are riskier than (3) options (those with strike prices exactly equal to the current market price of the underlying stock) In this case, the cost of 600 puts would be S (4) How about using out-of-the-money puts say, those with a $70.00 strike price, trading at S0.90? Explain. (Select from the drap-down menus.) Even though (7) $(8) But if the stock price drops to $70.00, Myles would lose $7.50 per share in unprotected capital gains. His profit on the out-of-the-money put hedge would be S (1) O True (2) Oin-the-money In the worst case, the investor would lose S (5) compared to only $(6) with an at-the-money option. options are inexpensive, using those options to create a put hedge will leave part of the profits unprotected. For example, using the put with a strike price of $70.00 would cost only Round to the nearest cent.) (3) O in-the-money (4) 1.750.00 O 6,402.00 O 540.00 (5) 1.750.00 ()O 1,750.00 O 6,402.00 O 540.00 (7) O O (8) O 1,750.00 O 6,402.00 O 540.00 in-the-money at-the-money out-of-the-money O 6,402.00 0 540.00 O False O At-the-money O Out-of-the-money O at-the-money O out-of-the-money