Question

magine that you are holding 6,100 shares of stock, currently selling at $80 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 $85 are selling at $3, and January puts with a strike price of $75 are selling at $5. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $71, $80, $91? What will the value of your portfolio be if you simply continued to hold the shares? stock Prce $80 $91 $71 Portfolio Value If collar is used If you continued to hold the shares

Answer 1

solution stock price 80 445300 475800 506300 433100 488000 555100 71 91 If collar is used (Note 1) If you continued to hold the shares (Note 2) Note 1: 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 5-3 Note 2: calculation of value of portfolio If you continued to hold the shares stock price at expiration Net proceeds per share x Number of shares 85 71 91 6100 6100 6100 value of portfolio If you continued to hold the shares 75 433100 488000 555100 calculation of value of lio if collar is used stock price at expiration 91 91 71 value of stock Add value of Put (75-71) Less : value of call (91-85) Less : Initial outlay Net proceeds per share x Number of shares value of portfolio if collar is used 71 80 0 0 0 -6 83 610061006100 445300 475800 506300 73 78 4トー Sheet907 Sheet908 . Sheet909 Sheet910 Sheet911 Sheet91 2 Sheet91 3 Sheet914·Sheet915 / ENG12:37 UK 10 05/2019