Ed Martin, the pension fund manager for Stark Corporation, is considering purchase of a put option in
Question:
a. Ignoring any brokerage fees or dividends, what profit or loss will Ed make if he buys the option and the lowest price of Carlisle stock during the 90 days is $46, $44, $40, and $35?
b. What effect would the fact that the price of Carlisle’s stock slowly rose from its initial $46 level to $55 at the end of 90 days have on Ed’s purchase?
c. In light of your findings, discuss the potential risks and returns from using put options to attempt to profit from an anticipated decline in share price.
Step by Step Answer:
a 45 46 100 shares 100 The option would not be exercised ...View the full answer
Principles of managerial finance
ISBN: 978-0132479547
12th edition
Authors: Lawrence J Gitman, Chad J Zutter
Related Video
Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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