Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You would like to construct a position that will have a constant ceiling on the total profit if stock price goes down and a

 

You would like to construct a position that will have a constant "ceiling" on the total profit if stock price goes down and a constant "floor" on the total loss if the price goes up. Use must use two put options to achieve this result. You have access to two put options with the following characteristics: Option A: strike price of $45, the price of this put option is $4 per share. Option B: strike price is $40, the price of this put option is $2 per share Both options have the same time to maturity and can only be excercised on expiration date. (a) Describe you position in the two put options. (7 points) Given your answer in part a answer parts b, c and d about the combined position. (b) What is your total profit or loss per share if the stock price is $43 per share at expiration? (6 points) (c.) What is your total profit or loss per share if the stock price is $5 per share at expiration? (6 points) (d) What is your total profit or loss per share if the stock price is $80 per share at expiration? (6 points)

Step by Step Solution

3.33 Rating (156 Votes )

There are 3 Steps involved in it

Step: 1

SOLUTION a To construct a position with a constant ceiling on the total profit if stock price goes down and a constant floor on the total loss if the ... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Foundations of Financial Management

Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta

10th Canadian edition

1259261018, 1259261015, 978-1259024979

More Books

Students also viewed these Finance questions

Question

What kind of financial pressures can an LBO cause?

Answered: 1 week ago