IPM_Quize6(a)_Solution

IPM_Quize6(a)_Solution - BUS 415 Investment and Portfolio...

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BUS 415 Investment and Portfolio Management Spring 2011, AUBG Quiz #6(a) Problem 1 ( 12 points ) Josh Finance has just purchase a stock index fund, currently selling at $400 per share. To protect against losses, Josh also purchases an at-the- money European put option on the fund for $20 with exercise price $400, and 3- month time to expiration. Susan Calm, Josh’s financial adviser, points out that Josh is spending a lot of money on the put. She notes that 3-month put with strike price of $390 cost only $15, and suggest that Josh use the cheaper put. a. (10 points ) Analyze Josh’s and Susan’s strategies by drawing the payoff/profit tables and diagrams for stock-plus-put positions for various values of the stock fund in 3 months. (Note : use the tables below to show the cost and payoffs of each of the two strategies). b. (2 points ) When does Susan’s strategy do better? When does it do worse? Which of the two strategies entails greater systematic risk? Solution:
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IPM_Quize6(a)_Solution - BUS 415 Investment and Portfolio...

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