Question 6. Protective Put (10 marks)

Suncor Energy Inc. (SU) shares are listed on the New York Stock Exchange. At 9:30 a.m. on January 14, 2016, these shares sold for $21.85 per share. The volatility on the returns of Suncor shares is approximately 24%. The following call and put option contracts were available for the months of January, February, and March:

	CALLS
Strike/Expiry	January 22, 2016	February 19, 2016	March 18, 2016
23	0.34	0.72	0.96
24	0.13	0.41	0.69
25	0.25	0.26	0.40

	PUTS
Strike/Expiry	January 22, 2016	February 19, 2016	March 18, 2016
23	1.28	2.01	2.14
24	2.63	2.80	2.92
25	3.60	3.70	3.95

Each option contract involves 100 shares. The risk-free rates for these three expiration dates are 0.6%, 1%, and 1.2%. All three rates are continuously compounded.

Given the information on Suncor shares and options above, construct a protective put using the 23-put with February expiration. Hold the protective put position until expiration.

b. Use a table to show the payoffs and profits when the put option expires in-the-money and out-of-the-money. (2 marks)

c. Calculate the potential profits for this protective put, using share prices ranging from 0 to 26. Plot a graph of these potential profits, with share prices on the x-axis, and profits on the y-axis. (Hint: It may be easier to do this in an Excel spreadsheet.)