finance question??? need help please!!!!

Posted on 2014-11-18 06:54:00 in Finance by ROBOT

1. You hold 600 shares of XYZ stock. You bought the stock several years ago at 48.50, and the shares are now trading at 75. You are concerned that the market might go down. You do not want to sell the stock, but you would like to be able to protect the profits you have made. You decide to hedge the position by buying puts on the stock. There are 2 puts available expiring in 3 months. One has a strike price of 75 and is priced at 2.50. The second has a strike of 70 and is priced at .80. Answer parts a,b,c,d assuming you are using the put with a strike of 75

a) How many puts should you buy to fully hedge your position?
b) How much profit or loss will you make on this deal if the price of the stock does indeed drop to $60 a share by the expiration date of the puts? c) What would be your profit or loss if the stock kept going up in price and reached $90 a share by the expiration date?
d) What are the advantages and disadvantages of using puts as a hedge?

2. Use the information in problem 1 regarding XYZ stock. Assume the following: 1. there is a futures contract on XYZ stock priced at $76 with a delivery date 3 months from now, 2. that a hedge using futures would be held until the delivery date, 3. the contract size of the futures contract is 100 shares of XYZ stock.
a) Repeat parts b and c from problem 1, but now hedge the position using futures. Show your profit or loss assuming the original purchase price and assuming the stock price moves to $60, $75, and $90 a share.
b) What are the advantages and disadvantages of using futures as a hedge? Compare and contrast options versus futures as hedging devices.
c) Now answer parts b and c from problem 1 assuming you use the put with a strike of 70. Discuss the pros and cons of using the 70 versus the 75 puts and discuss why choosing an exercise price on a protective put is like deciding which deductible to take on an insurance policy

3. You just bought 100 shares of a stock at $73 per share. You have decided to sell a call option on the stock. There are 2 options with July expirations available. One with a strike of 75 priced at $2.30 and one with a strike of 80 priced at $.80. For each of the options answer the following questions:
a) If you get called, what is your effective selling price on the stock?
b) What is your total profit if the stock goes to $80 at expiration? Goes to $85 at expiration?
c) What is your total profit if the stock goes to $80 and $85 if you had just bought the stock without selling a call option?
d) Explain the issues you would be considering in your choice of whether you should sell the 75 versus the 80 option?

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