Identify the strategy employed by Dumo above. Protective Put Tabulate the Profit to the strategy at expiration for the following Exercise price R30; Stock price 20. Exercise price R30; Stock price 35.
Identify the strategy employed by Dumo above. Protective Put Tabulate the Profit to the strategy at expiration for the following Exercise price R30; Stock price 20. Exercise price R30; Stock price 35.
Chapter14: Property Transactions: Capital Gains And Losses, § 1231, And Recapture Provisions
Section: Chapter Questions
Problem 43P
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Question
- Dumo is a trader at ZNF Equity traders and has just identified a stock, UFSI Limited, which is currently trading at R25 per share. Dumo decides to take a long position in at-the money put option and simultaneously buys one share of UFSI stock. The put option expires in 3 months’ time and costs R2.5 per share. Assume a contract consists of one put option.
Required:
- Identify the strategy employed by Dumo above.
Protective Put
- Tabulate the Profit to the strategy at expiration for the following
- Exercise price R30; Stock price 20.
- Exercise price R30; Stock price 35.
Expert Solution
Question 1:
The strategy employed by Dumo is protective put investment strategy. A protective put position is formed by purchasing a stock and purchasing put options on the share-for-share origin.
Question 2:
I) The computation of profit as follows:
Exercise price 30, stock price 20
For long position (purchase) in Put option,
Pay off from long position in stock:
Hence, the profit is R 2.5.
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