Question 8 (15pts.) You are attempting to formulate an investment strategy. On the one hand, you think there is great upward potential in the stock market and would like to partic- ipate in the upward move if it materializes. However, you are not able to afford substantial stock market losses and so cannot run the risk of a stock market collapse, which you recognize is also possible. Your uncle suggests a protective put position: Buy shares in a market-index stock fund and put options on those shares with three-months until expiration and exercise price of $1,560. The stock index is currently at $1,800. However, your investment adviser suggests you instead buy a three-month call option on the index fund with exercise price $1,680 and buy three-month T-bills with face value $1,680. a) On the same graph, draw the payoffs to each of these strategies as a function of the stock fund value in three months. (Hint: Think of the options as being on one share of the stock index fund, with the current price of each share of the index equal to $1,800.) b) Which portfolio must require a greater initial outlay to establish? (Hint: Does either port- folio provide a final payoff that is always at least as great as the payoff of the other portfolio?) c) Suppose the market prices of the securities are as follows: $1,800 1,620 Stock fund T-bill (face value $1,680) Call (exercise price $1,680) Put (exercise price $1,560) 240 12 Make a table of profits realized for each portfolio for the following values of the stock price in three months: Sr = $0, $1,400, $1,600, $1,800, and $1,920. Graph the profits to each portfolio as a function of ST on a single graph. d) Which strategy is riskier