You are an Investment Advisor with a Wealth Management firm. One of your clients has approached you for investing Rs. 10 Lacs for one year. He is a conservative investor and would like to protect his principal. He is considering buying a stock that is currently trading at Rs 800/- but is worried about the downside risk. The yield on one-year government bonds is 8% pa. Call options with strike prices of Rs. 800 and Rs 830 are trading at Rs. 109.60 and Rs 96 respectively. The stock price at the expiration of the call options may possibly lie in the range of Rs 600/- to Rs. 1200/-.

Suggest an appropriate trading strategy using bonds, calls, and /or stock, with the objective of protecting the principal amount for the investor

Lot Size of Stock = 1250

Answer rating: 100% (QA)

The strategy can be a combination of Purchasing the stock selling call options and investing remaini... View the full answer