Question

6 Imagine that you are holding 5,000 shares of stock, currently selling at $40 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January call options with a strike price of $45 are selling at $2, and January puts with a strike price of $35 are selling at $3. 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, $40 $50? What will the value of your portfolio be if you simply continued to hold the shares? 10 points еВook Stock Price Portfolio Value $30 $40 $50 Print If collar is used References If you continued to hold the shares

Answer 1

Solution: stock price 30 40 50 170000 195000 220000 150000 200000 250000 If collar is used (Note 1) If you continued to hold the shares (Note 2) Note 1: Note 2: collar means buying stock along with writing OTM call and buying OTM put simultenously to hedge downside risk. call strike price call premium received Put strike price Put premium paid Initial outlay=3-2 calculation of value of portfolio If you continued to hold the shares Net proceeds per share x Number of shares value of portfolio If you continued to hold the shares stock price at expiration 30 40 50 5000 5000 5000 150000 200000 250000|| calculation of value of portfolio if collar is used value of stock Add : value of Put (35-30) Less : value of call (50-45) Less : Initial outlay Net proceeds per share x Number of shares value of portfolio if collar is used stock price at expiration 30 40 50 30 40 50 500 0 0 5 -1 -1 -1 34 39 5000 5000 5000 170000 195000 220000 44 Sheet316 Sheet317 Sheet318 Sheet319 Sheet320 Sheet321 Sheet322 Sheet323 Sheet324 e 9 S OR A ENG 09:43 . D US 24/11/2019