Suppose that an investor owns one share of ABC stock currently prices at $30. The investor is worried about the possibility of a drop in share price over the next three months and is contemplating purchasing put options to hedge this risk. Compute the following:

The profits on the unhedged position if the stock price in three months is $25.
The profits on the unhedged position if the stock price in three months is $35.
The profits for a hedged stock position if the stock price in three months is $25, the strike price on the put is $30, and the premium is $1.5.
The profits for a hedged stock position if the stock price in three months is $35, the strike price on the put is $30, and the premium is $1.5.

Answer rating: 100% (QA)

To calculate the profits on the unhedged position we need to consider the change in stock price and ... View the full answer