Question

you work as a junior analyst at Carson Company and you are assigned to form options strategies in relation to the stock of IBM Corporation (IBM), a software company. In these two projects, you will give advice and data analysis to one of the executives at Carson Company.

In this project, you will suppose it is on 1 January 2019, and you will form trading strategies based on information available up to 1 January 2019. Afterwards, you will jump forward to 1January 2020, and assess the profit from your options strategies, based on the stock price at this later date. In your answer, use European options on non-dividend-paying stock. Assume that the estimated volatility of IBM per annum is calculated as 30.5% (or 0.305). The IBM stock price on 1 January 2019 is 2370 pence. The 12-month sterling rate for LIBOR on 1 January 2019 is 1.5% (or 0.015)

1.Suppose you have a long position in the stock on 1 December 2019. How would you hedge against price declines for a one-year period, using puts, calls and spread options?

2.On 1 December 2019 the price of IBM stock is 1923 pence. Calculate the payoffs for the strategies you chose in Q1a combined with the long position in the stock. Comment on your results.