When Mark Cuban sold his company to Yahoo in 1995, he used a collar to protect himself against decreases in the price of Yahoo stock. He had acquired these shares when he sold his company but was not allowed to sell the shares for a three year period. This collar consisted of buying a put and selling a call. Assume Yahoo was trading at $100 when this collar was constructed.

1. Draw the collar payoffs and explain how the collar provides insurance against decreases in the Yahoo price.
2. Are there other option strategies that would have provided insurance? Why did he use a collar?
3. Cuban purchased the collar from an investment bank and the terms may not have been very favorable. Why did he not purchase exchange-traded options?

Answer rating: 100% (QA)

To draw the collar payoffs lets break it down 1 Buying a Put Option This gives Mark Cuban the right to sell Yahoo stock at a predetermined price known ... View the full answer