Assume that in problem 11 the firm had purchased 80 October 1100 put option contracts on the S&P 500 Index listed in Table 16–5 on page 426, instead of selling the call options. If the S&P 500 Index goes down by 14 percent (see 11 c) at expiration,
a. What will be your profit on the puts? Comparing that to your loss on the stock portfolio in problem 11 b, what is your net overall gain or loss?
b. Compare the protection afforded by the call-writing hedge in problem 11 with the protection afforded by the put purchase in this problem.
c. Suggest any modifications to the call writing or put purchase strategy that would allow you to increase your protection even more. A general statement is all that is required.

  • CreatedSeptember 21, 2015
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