A little more than 10 months ago, Luke Weaver, a mortgage banker in Phoenix, bought 300 shares
Question:
$550 each (quoted at $5.50).
Questions
a. Given the circumstances surrounding Luke's current investment position, what benefits could be derived from using the puts as a hedge device? What would be the major drawback?
b. What will Luke's minimum profit be if he buys 3 puts at the indicated option price? How much would he make if he did not hedge but instead sold his stock immediately at a price of $75 per share?
c. Assuming Luke uses 3 puts to hedge his position, indicate the amount of profit he will generate if the stock moves to $100 by the expiration date of the puts. What if the stock drops to $50 pershare?
d. Should Luke use the puts as a hedge? Explain. Under what conditions would you urge him not to use the puts as a hedge?
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Related Book For
Fundamentals of Investing
ISBN: 978-0133075359
12th edition
Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk
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