Question
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
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 participate in the upward move if it materialises. However, you are not able to afford substantial stock market losses. Your investment advisor suggests a protective put position: Buy shares in a market index stock fund and buy put options on those shares with three months until expiration and exercise price of $400.
The market prices of the securities are as follows: Stock fund $450 T-bill (face value $420) $405 Call (exercise price $420) $60 Put (exercise price $400) $4
Pls fill in this table below: (ST stands for the price of Stock Fund at maturity, and the payoff can be a function of ST)
ST< 400 | 400 St 420 | St > 420 | |
Stock Fund | |||
Put | |||
Payoff | |||
Profit |
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