Question
You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $107
You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $107 at year-end. XYZ currently sells for $107. Over the next year the stock price will increase by 12% or decrease by 12%. The T-bill rate is 5%. Unfortunately, no put options are traded on XYZ Co.
a. | Suppose the desired put option were traded. How much would it cost to purchase?(Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the "$" sign in your response.) |
Purchase cost | $ |
b. | What would have been the cost of the protective put portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the "$" sign in your response.) |
Cost | $ |
c. | What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = 107? Show that the payoff to this portfolio and the cost of establishing the portfolio matches that of the desired protective put. |
Portfolio | S = 94.16 | S = 119.84 |
Buy 0.5 shares |
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Invest in T-bills |
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Total |
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