Question 6

Mr. Smith wants to construct a protective collar (long stock, long put, short call) on the Daisy Seneca Corporation stock. He owns 100 shares of the stock. The Daisy Seneca stock currently trades for $52 per share. Mr. Smith buys 100 put options on this stock with the strike price of $50 and sells 100 call options with the strike price of $55. Both options expire in 6 months. The annual volatility of returns on Daisy Seneca is 23%. The risk free rate is 2% per annum. a. Construct a payoff table for this strategy b. Show on the graph how the payoff of this strategy depends on the price of the Daisy Seneca stock c. Find the price of the put and call options involved, using the 2-period binomial model d. Find the price of these options using the Black Scholes formula e. In your opinion, what is the purpose of this strategy?