Q3) Suppose that an investor has a holding of 2000 shares in AMZN which is selling...

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Q3) Suppose that an investor has a holding of 2000 shares in AMZN which is selling for $110 at the stock market. The investor is bullish on AMZN as an investment, thinks that the stock has more room to go up, but is worried that the stock market will be soft, with a looming recession, in the next 6 months. So, he decides to buy put options to hedge his Amazon position for the next 6 months. The three put options, all with the same expiration date in 6 months, he is considering are as follows: Put A: Exercise price = 95.00. Current price = 4.81 Put B: Exercise price = 100.00. Current price = 6.25 Put C: Exercise price = 105.00. Current price = 8.20 a) Explain which of the 3 put options above would offer the investor the greatest amount of protection. No calculations necessary. (5 marks) b) Suppose that the investor chooses to go with Put B. How many put contract would he need to buy and how much would it cost him in put premiums today to set up a full hedge? (5 marks) c) Suppose that at option expiration, AMZN stock closes at $125 per share. How much are the put options (given in part (b)) in this investor's portfolio worth at that point? Is he happy that he set up a hedge using the put options for his Amazon stock holdings given that Amazon stock went up to $125 in 6 months' time? Explain briefly. (5 marks) d) In an essay of 600 words, first explain foreign exchange risk and give a detailed, real- world example for it, in a corporate business context. Then, discuss in general how currency futures, forwards and options can be used to hedge foreign exchange risk. Again, work on your example from the first part of your question and propose a derivatives-based hedging solution for your case. (15 marks) [Total: 30 marks] Q3) Suppose that an investor has a holding of 2000 shares in AMZN which is selling for $110 at the stock market. The investor is bullish on AMZN as an investment, thinks that the stock has more room to go up, but is worried that the stock market will be soft, with a looming recession, in the next 6 months. So, he decides to buy put options to hedge his Amazon position for the next 6 months. The three put options, all with the same expiration date in 6 months, he is considering are as follows: Put A: Exercise price = 95.00. Current price = 4.81 Put B: Exercise price = 100.00. Current price = 6.25 Put C: Exercise price = 105.00. Current price = 8.20 a) Explain which of the 3 put options above would offer the investor the greatest amount of protection. No calculations necessary. (5 marks) b) Suppose that the investor chooses to go with Put B. How many put contract would he need to buy and how much would it cost him in put premiums today to set up a full hedge? (5 marks) c) Suppose that at option expiration, AMZN stock closes at $125 per share. How much are the put options (given in part (b)) in this investor's portfolio worth at that point? Is he happy that he set up a hedge using the put options for his Amazon stock holdings given that Amazon stock went up to $125 in 6 months' time? Explain briefly. (5 marks) d) In an essay of 600 words, first explain foreign exchange risk and give a detailed, real- world example for it, in a corporate business context. Then, discuss in general how currency futures, forwards and options can be used to hedge foreign exchange risk. Again, work on your example from the first part of your question and propose a derivatives-based hedging solution for your case. (15 marks) [Total: 30 marks]

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a Put B would offer the investor the greatest amount of protection This is because Put B has the highest strike price of the three options meaning that it would only be in the money if the price of AM... View the full answer