Question: You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $100

You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $100 at year-end. XYZ currently sells for $100. Over the next year the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on XYZ Co.

a. Suppose the desired put option were traded. How much would it cost to purchase?

b. What would have been the cost of the protective put portfolio?

c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = 100? Show that the payoff to this portfolio and the cost of establishing the portfolio matches that of the desired protective put.

Step by Step Solution

★★★★★

3.38 Rating (154 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a uS 0 110 P u 0 dS 0 90 P d 10 The hedge ratio is A portfolio comprised of one share a... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

225-B-A-I (2963).docx

120 KBs Word File

Students Have Also Explored These Related Accounting Questions!

How much will it cost to purchase an ordinary annuity delivering semiannual payments of $2000 for 12 1/2 years if the money used to purchase the annuity can earn 7.5% compounded semiannually?

How much will it cost to purchase a 20-year indexed annuity in which the end-of-quarter payments start at $5000 and grow by 0.5% every quarter? Assume that the money used to purchase the annuity...

How much would it cost to paper the entire United States (including Alaska and Hawaii) with dollar hills? What would be the cost to each person in the United States?

You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $108 at yearend. XYZ currently sells for $108. Over the next year, the stock...

You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $109 at year-end. XYZ currently sells for $109. Over the next year, the stock...

Reconsider the determination of the hedge ratio in the two-state model (Section 16.2), where we showed that one-third share of stock would hedge one option. a. Assuming a stock price of $224, what...

You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $101 at yearend. XYZ currently sells for $101. Over the next year, the stock...

You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of 230 at year-end. XYZ currently sells for 230. Over the next year, the stock...

part c, please You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $102 at year end. XYZ currently sells for $102. Over the next...

You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $109 at year- end. XYZ currently sells for $109. Over the next year, the stock...

Contrast the window-of-opportunity approach with discovery-driven planning.

The vibrations of the body of a helicopter due to the periodic force applied by the rotation of the rotor can be modeled by a frictionless spiring-mass-da system subjected to an external periodic...

Discuss the three major problems embodied in the near-pure command system that existed in China from 1949 to 1978.

In what ways did your leadership make your community and the world a better place?

A closed-end fund starts the year with a net asset value of $12.00. By year-end, NAV equals $12.10. At the beginning of the year, the fund was selling at a 2% premium to NAV. By the end of the year,...

A bank offers you two alternative interest schedules for a savings account of $100,000 locked in for 3 years: ( a ) a monthly rate of 1%; ( b ) an annually, continuously compounded rate ( r cc ) of...

You invested $1 million at the beginning of 2008 in an S&P 500 stock-index fund. Given the rate of return for 2008, 38.6%, what rate of return in 2009 would have been necessary for your portfolio to...

A project has a unit price of $5,000, a variable cost per unit of $4,000, fixed costs of $17,000,000, and depreciation expense of $6,970,000. What is the accounting break-even quantity?

Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of 16.7 billion. The cost of...

Use the data below to construct the advance/decline line and Arms ratio for the market. Volume is in thousands of shares. (Input all amounts as positive values. Do not round intermediate...