Question: Hedging: example using options Context : Consider an investor who in May of a particular year owns 1 Microsoft shares, purchased at the current price

Hedging: example using options

Context :

Consider an investor who in May of a particular year owns 1 Microsoft shares, purchased at the current price of $28 per share.

The investor is concerned about a possible share price decline in the next 2 months and wants protection by buying a call or put option

The following 2-month options are available in the market :

Call, strike price of $24, premium of $4.5

Call, strike price of $28.5, premium of $1

Put, strike price of $25, premium of $0.2

Put, strike price of $27.5, premium of $1

Question:

A: What hedging strategy could you advise to the investor in order to hedge his risk of a possible Microsoft share price decline ? Should the investor buy a call or a put?

B: For each one of these 2 puts :

What will be the diagram of the overall net payoff?

What will be the formula for the overall net payoff?

What is the breakeven share price between these 2 options (calls or puts)

What option would you recommend?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Options can also be used for hedging. Consider an investor who in May of a particular year owns 1,000 Microsoft shares. The share price is $28 per share. The investor is concerned about a possible...

GIVIISI V. Common Size Income Statement Prepare a common size income statement for two years and compare/contrast the changes (Refer to chapter 17) VI. Ratio Analysis of Financial Statements Prepare...

Cathy Talbert is the general manager of Barham Company, which provides data-management services for physicians in the Columbus, Ohio, area. Barham Company is having a rough year. Net income trails...

Case 2. (Learning Objectives 1, 2, 5: Make an investment sale decision) Cathy Talbert is the general manager of Barham Company, which provides data-management services for physicians in the Columbus,...

Resources: Appendix A: The Home Depot, Inc. Annual Report in Fundamentals of Financial Accounting Write a 1,050- to 1,750-word paper in which you answer the following questions: What does the...

I noticed there are existing papers available, however could I get a new paper? Appendix A: The Home Depot, Inc. Annual Report in Fundamentals of Financial Accounting Write a 1,050- to 1,750-word...

I need someone to help me this attached assignment NOTE. the format the analysis have to be in right? I have attached a picture of horizontal analysis of the balance sheet Objective: to obtain...

Resources:Appendix A: The Home Depot, Inc. Annual Report inFundamentals of Financial Accounting Writea 1,050- to 1,750-word paper in which you answer the following questions: What does the...

Resources: Appendix A, The Home Depot, Inc. Annual Report in Fundamentals of Financial Accounting Writea 1,050- to 1,750-word paper in which you address the following: Does managements assessment of...

refer to attachment and answer the following...refer to page 35...can be like a page and a half Strategy : Identify accounting choices which allow managers to strategically communicate economic...

6. In figure 4, DB is perpendicular to the line ABC, AE=25cm, BC=15 cm, angle EAB=30, and angle BCD=45. Calculate the length of DE.

Potlatch Corporation has issued various types of bonds such as term bonds, income bonds, and debentures. Differentiate between term bonds, mortgage bonds, collateral trust bonds, debenture bonds,...

Caring for the sick and dying has historically been done by whoever was best qualified men women

A company is preparing completing their Cash Budget. The following data has been prepared for cash receipts and payments. January February March Cash receipts $1,061,200 $1,182,400 $1,091,700 Cash...