You have been working as a treasurer at Citibank for the past five years and have previously used swaps, futures and forward contracts to mitigate risk. However, you have never used options so you are interested in exploring the market. You want to start with small transactions and are considering purchasing a European put on a share for $3. The stock is 42 and the strike price is $40. Furthermore, you are also considering purchasing a call option with the same terms as the put option. Consider the following questions:Under what circumstances does the investor make a profit? Under what circumstances will the options be exercised? Draw diagrams showing the variation of the investor’s profit.Derivatives are zero sum games. Justify the statement with the help of diagrams and the article shared in class.

Payoff the period in which the return is provided to the investor in return to the investment.

Answered: You have been working as a treasurer at…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter6: Risk And Return

Section: Chapter Questions

Problem 6MC: Your client is shocked at how much risk Blandy stock has and would like to reduce the level of risk....

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You have been working as a treasurer at Citibank for the past five years and have previously used swaps, futures and forward contracts to mitigate risk. However, you have never used options so you are interested in exploring the market. You want to start with small transactions and are considering purchasing a European put on a share for $3. The stock is 42 and the strike price is $40. Furthermore, you are also considering purchasing a call option with the same terms as the put option.

Consider the following questions:

Under what circumstances does the investor make a profit? Under what circumstances will the options be exercised? Draw diagrams showing the variation of the investor’s profit.
Derivatives are zero sum games. Justify the statement with the help of diagrams and the article shared in class.

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