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Myles Houck holds 800 shares of Lubbock Gas and Light. He bought the stock several years ago at $47.22, and the shares are now trading
Myles Houck holds 800 shares of Lubbock Gas and Light. He bought the stock several years ago at $47.22, and the shares are now trading at S76.00. 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 buying 8 puts on Lubbock G&L. The 3-month puts camy a strike price of S76.00 and are currently trading at $2.69. a. How much profit or loss will Myles make on this deal if the price of Lubbock G&L does indeed drop, to $61.00 a share, by the expiration date on the puts? b. How would he do if the stock kept going up in price and reached $91.00 a share by the expiration date? c. What do you see as the major advantages of using puts as hedge vehicles? Would Myles have been better off using s-that is, puts wi h an $85.50 strike price that are ading at $10.53? How about using out-of-the-money puts-say hose with a $71.00 strike price, trading at $0.90? e-money put Explain a. If the price of Lubbock G&L does indeed drop, to $61.00 a share, by the expiration date on the puts, Myles will have a profit (or loss) of $L. (Round to the nearest cent.) b. If the stock kept going up in price and reached $91.00 a share by the expiration date he would have a profit (or loss) of Round to the nearest c c. What do you see as the major advantages of using puts as hedge vehicles? Decide whether the statement below is true or false 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? Y Select from the drop-down menu. d. Would Myles have been better off using in-the-money puts-that is, puts with an $85.50 strike price that are trading at S10.53? (Select from the drop-down menus options are more expensive, and as a hedging device, they are riskier than options (those with strike prices exactly equal to the current market price of the underlying stock In this case he cost of 800 puts would be Vl. In the worst case, the investor would lose Y compared to only with an at-the-money option
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