Troy is worried about Mega co. In July 2007 he decides to buy a put option to protect his position in the stock. The price of the stock has dropped to $14 per share. The put option has an expiration of January 2008, an exercise price of $13, and a premium of $2.

How many option contracts should he purchase to fully hedge his long position in Mega co? The price of Mega co. has dropped to $10. If the option is exercised, what is Troys total gain/loss?

Details of the Brokerage Account Stock Shares Beta Std. Dev Div Yield Avg. Return Cost FMV Mega co 1000 .88 12.5% 4.0% 12.5% Tiny co 1000 1.24 18% 0 8,046.4714,500 15% 10,724.35 12,333 Oil co 1000 1.00 1096 3.5% 8% 1,135.70 15,150 Auto co 1000 1.12 10% 3.0% 10% 12,124.72 16,138 TOTAL 58,121 Note: The stock portfolio has a correlation coefficient with the market of .80