Question

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 for 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 of $45 are selling at $2, and January puts with a strike price of $35 are selling at $3. Assume that you hedge the entire 5,000 shares of stock.
(a)
What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $30. (Omit the "$" sign in your response.)



Stock price $


(b)
What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $40? (Omit the "$" sign in your response.)



Stock price $


(c)
What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $50? (Omit the "$" sign in your response.)



Stock price $

Answer 1

Answer

The answer and procedures of the exercise are attached in the following archives.

Step-by-step explanation:

You will find the procedures, formulas or necessary explanations in the archive attached below. If you have any question ask and I will aclare your doubts kindly.