Question: The profit calculation in the chapter assumes that you borrow
The profit calculation in the chapter assumes that you borrow at a fixed interest rate to finance investments. An alternative way to borrow is to short-sell stock. What complications would arise in calculating profit if you financed a $1000 S&R index investment by shorting IBM stock, rather than by borrowing $1000?
Answer to relevant Questionsana A default-free zero-coupon bond costs $91 and will pay $100 at maturity in 1 year. What is the effective annual interest rate? What is the payoff diagram for the bond? The profit diagram? Suppose you invest in the S&R index for $1000, buy a 950-strike put, and sell a 1107 strike call. Draw a profit diagram for this position. How close is this to a zero-cost collar? Suppose that you short the S&R index for $1000 and sell a 1000-strike put. Construct a table mimicking Table 3.1 that summarizes the payoff and profit of this position. Verify that your table matches Figure 3.5. For the ...If XYZ does nothing to manage copper price risk, what is its profit 1 year from now, per pound of copper? If on the other hand XYZ sells forward its expected copper production, what is its estimated profit 1 year from now? ...
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