What are the trade-offs facing an investor who is considering buying a put option on an existing
Question:
Step by Step Answer:
Buying a put option on an existing portfolio provides por...View the full answer
Related Video
A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.
Students also viewed these Accounting questions
-
What are the trade-offs facing an investor who is considering writing a call option on an existing portfolio?
-
What would you recommend to an investor who is considering making an investment in a stock which plots below the security market line (SML)? Explain.
-
An investor who is an individual could earn a 10% return either from shares that pay a low dividend and have high growth or from shares that pay a high dividend and have low growth. Assuming that the...
-
Define a passive portfolio construction strategy and briefly discuss how reasonable it might be for an investor to pursue a passive strategy. Explain the role of risk aversion in the construction of...
-
If a basketball team's present record is 42 wins and 36 losses, how many consecutive games must it win so that its winning record reaches 60%?
-
Water flows by gravity from one lake to another as sketched in Fig. P5.113 at the steady rate of \(80 \mathrm{gpm}\). What is the loss in available energy associated with this flow? If this same...
-
A \(100 \mathrm{MW}\) ocean thermal gradient power plant is to be designed for a location where the ocean surface temperature is \(300 \mathrm{~K}\left(80^{\circ} \mathrm{F} ight)\) and water at a...
-
Selected data on merchandise inventory, purchases, and sales for Myrina Co. and Lemnos Co. are as follows: Instructions 1. Determine the estimated cost of the merchandise inventory of Myrina Co. on...
-
1. Find the components of the velocity of a helicopter traveling 155 km/h at an angle of 25 to the ground. 2. A submarine dives 110.0 m at an angle of 10.0 below the horizontal. What are the two...
-
The following table summarizes the operating results for Bene Petits first year of operations: Bene Petit First year operating data: Single (1 serving) Dual (2 servings) Family (4 servings) Total...
-
We said that options can be used either to scale up or reduce overall portfolio risk. What are some examples of risk-increasing and risk-reducing options strategies? Explain each.
-
Why do you think the most actively traded options tend to be the ones that are near the money?
-
Use the rules in Table 5.6 and Equations (2)(4) to evaluate the integral. [121 0 (2t - 3) dt
-
Queen Ltd has been looking at ways to increase sales. The CEO is proposing that the company offer more attractive credit terms of 3/10 net 60. The positive effect of these new credit terms would be a...
-
1c. One futures contract on gold is equal to 100 ounces of gold. On Dec. 5, 2023 the gold futures contract for February delivery closed at about $2,040 per ounce. The initial margin for a gold...
-
1. Stellar Espresso, a coffee store chain, wants to buy a building to house its coffee roasting operations. The price of the building is $1.5 million and the company can finance 80% of the building...
-
John has a Portfolio of $17,000 to invest. He invested $3,500 in Firm A. He invested $7,000 in Firm B. He invested $6,500 in Firm C. The ROI for Firms A, B, and C are 12%, 16%, and 10%, respectively....
-
Q.1 (12.5) The Financial Institution "APOLLON INC" in the sunny State of California is implementing the latest risk HEDGING techniques. The Treasurer of the institution employs a Binomial Option...
-
Entity C, a newly incorporated company, uses the latest version of a software package (EXODUS) to cost and value its inventory. The software uses the AVCO formula to value inventory. The following...
-
Will the prediction interval always be wider than the estimation interval for the same value of the independent variable? Briefly explain.
-
How do cost allocations act as a tax system?
-
You find the following order book on a particular stock. The last trade on the stock was at $70.54. a. If you place a market buy order for 100 shares, at what price will it be filled? b. If you place...
-
You are given the following information concerning two stocks that make up an index. What is the price-weighted return for theindex? Price per Share Shares Outstanding 53,000 62,000 End of Year $81...
-
Calculate the index return for the information in the previous problem using a value-weighted index.
-
The standard 2-pass spur gear train with the # of teeth on each gear as shown is driven is driven at 1000 RPM from shaft 2 with a torque of 25 in-lb. All the gears in the set have a diametral pitch...
-
Marigold, Inc. reports all its sales on credit, and pays operating costs in the month incurred. Amounts for 2022 are: March April May June July Budgeted sales $299500 $290000 $319700 $279100 $209800...
-
4. Superman is very strong. In trying to impress Lois Lane, he stands on top of a 12-storey building (-50 meters tall), lowers a very tall and wide straw into a pool of Kool-Aid and tries to drink....
Study smarter with the SolutionInn App