You think XYZ stock has potential for an upward move in price. You have no position whatsoever
Question:
You think XYZ stock has potential for an upward move in price. You have no position whatsoever in the stock now. You would like to take the opportunity of any up movement in price but want to strictly limit your downside risk. XYZ Stock price now = RM 12.00
a) Demonstrate using a diagram/ graph of the market outlook for XYZ stock.
b) Given the information on the derivative market for the option below, possible appropriate strategies. For each strategy
30 day Calls 30 day Puts
11.00 call @ 1.55 11.00 put @0 .25
12.00 call @ 0.70 12.00 put @ 0.45
13.00 call @ 0.22 13.00 put @ 1.40
i) State the name of the strategy.
ii) Graph the strategy (plot the position, label all axes, max, min points specify the option and state long or short position).
iii) Outline the risk profile.
iv) State the maximum profit, maximum loss, and breakeven point(s)
v) From a cost viewpoint, which is the best strategy?
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta