Alan just bought 100 shares of Global, Inc. (GLO) at $45 per share and as protection...

 

Transcribed Image Text:

Alan just bought 100 shares of Global, Inc. (GLO) at $45 per share and as protection he also bought a three-month put with a $45 strike price at a cost of $400. One of two scenarios is expected to occur in the next three months: (1) GLO stock declines to $33; (2) GLO stock rises to $61. a) Calculate the profit/loss and total rate of returns of Alan's investment with hedging (including the stock return, not just the option itself) under each scenario; b) Calculate the rate of return if Alan didn't buy the put option in each scenario; c) Compare the returns in (a) and (b) and explain how the hedge has provided protection for Alan's position in GLO. Ignore transaction costs. Alan just bought 100 shares of Global, Inc. (GLO) at $45 per share and as protection he also bought a three-month put with a $45 strike price at a cost of $400. One of two scenarios is expected to occur in the next three months: (1) GLO stock declines to $33; (2) GLO stock rises to $61. a) Calculate the profit/loss and total rate of returns of Alan's investment with hedging (including the stock return, not just the option itself) under each scenario; b) Calculate the rate of return if Alan didn't buy the put option in each scenario; c) Compare the returns in (a) and (b) and explain how the hedge has provided protection for Alan's position in GLO. Ignore transaction costs.

Answer rating: 100% (QA)

To calculate the profitloss and total rate of returns of Alans investment with hedging we need to consider both the stock return and the options impac... View the full answer