Question
You are an advisor to Queen of Sheba, the owner of Makeda. The current share price of Makeda is $68. You like the companys growth
You are an advisor to Queen of Sheba, the owner of Makeda. The current share price of Makeda is $68.
You like the companys growth potential, but you are concerned that stock prices will fall in the short- term. Makeda does not pay dividends.
There exist call and put options with one month to expiration. Each option is on one share of Makeda. The call has an exercise price of $80 and a premium of $1. The put has an exercise price of $60 and a premium of $2.
A) Design a hedging (insurance) strategy against a decline in the share price using PUT options. Calculate the initial cost (of the strategy) and your maximum gain and maximum loss on expiration day, per share. B) You are concerned about the high cost of the insurance provided by the strategy above. Using the put AND call options above, design a hedging strategy that will cost less money today and will have lower maximum losses on expiration day. Calculate the initial cost (of the strategy) and your maximum gain and maximum loss on expiration day, per share. C) Compare the two strategies above. Which strategy will perform better?
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