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?
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?
Chapter11: Managing Transaction Exposure
Section: Chapter Questions
Problem 35QA
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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
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?
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