You would like to be holding a protective put position on the stock of XYZ Co. t

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 180 at year-end. XYZ currently sells for 180. Over the next year, the stock price will either increase by 8% or decrease by 8%. The T-bill rate is 6%. Unfortunately, no put options are traded on XYZ Co.

How much would it cost to purchase if the desired put option were traded? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

What would be the cost of the protective put portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of 180 at year-end. XYZ currently sells for 180. Over the next year, the stock price will either increase by 8% or decrease by 8%. The T-bill rate is 6%. Unfortunately, no put options are traded on XYZ Co.

Explanation / Answer

If the stock moves up by 8%

=180*1.08 =194.4

=180*.92 =165.6

Price of put if pric is 194.4 =0

Price of put if price is 165.6 is 14.4

therfore the price of put is 0.5*(14.4)/(1.06)^0.5 =6.4079

b Cost f protective put is buy a stock at minmum value + value of put that is 6.4079

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.