Graph the payoff diagram for the collar described in Example 15.5. EXAMPLE 15.5 Collars A collar would
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Graph the payoff diagram for the collar described in Example 15.5.
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EXAMPLE 15.5 Collars A collar would be appropriate for an investor who has a target wealth goal in mind but is unwilling to risk losses beyond a certain level. Suppose you are contemplating buying a house for $160,000, for example. You might set this figure as your goal. Your current wealth may be $140,000, and you are unwilling to risk losing more than $20,000. A collar established by (1) purchasing 2,000 shares of stock currently selling at $70 per share, (2) purchasing 2,000 put options (20 option contracts) with exercise price $60, and (3) writing 2,000 calls with exer- cise price $80 would give you a good chance to realize the $20,000 capital gain without risking a loss of more than $20,000.
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Related Book For
Essentials Of Investments
ISBN: 9780073368719
7th Edition
Authors: Zvi Bodie, Alex Kane, Alan J. Marcus
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