Imagine that you are holding 5,000 shares of stock, currently selling at $40 per share. You are ready to sell the shares but wouldprefer to put off the sale until next year for tax reasons. If you continue to hold the shares until January, however, you face the risk thatthe stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal ofadditional funds. January call options with a strike price of $45 are selling at $2, and January puts with a strike price of $35 are sellingat $3. Assume that you hedge the entire 5,000 shares of stock.Required:a. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $30?b. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $40?c. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $50?a. Portfolio Valueb. Portfolio Valuec. Portfolio Value

a) $170,000b) $195,000c)$220,000Explanation: Calculate the value of portfolio (net proceeds from the…

Answered: Imagine that you are holding 5,000…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 23P

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