You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $102 at year-end. XYZ currently sells for $102. Over the next year, the stock price will increase by 7% or decrease by 7%. The T-bill rate is 4%. Unfortunately, no put options are traded on XYZ Company. Required: a. Suppose the desired put option were traded. How much would it cost to purchase? b. What would have been the cost of the protective put portfolio? c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X=102? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put. Complete this question by entering your answers in the tabs below. Required A Required B Required C What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X=102? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put. Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Portfolio Buy 0.5 shares Invest in T-bills Total S=94.86 S=109.14 Show less A
You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $102 at year-end. XYZ currently sells for $102. Over the next year, the stock price will increase by 7% or decrease by 7%. The T-bill rate is 4%. Unfortunately, no put options are traded on XYZ Company. Required: a. Suppose the desired put option were traded. How much would it cost to purchase? b. What would have been the cost of the protective put portfolio? c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X=102? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put. Complete this question by entering your answers in the tabs below. Required A Required B Required C What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X=102? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put. Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Portfolio Buy 0.5 shares Invest in T-bills Total S=94.86 S=109.14 Show less A
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $102 at
year-end. XYZ currently sells for $102. Over the next year, the stock price will increase by 7% or decrease by 7%. The T-bill rate is 4%.
Unfortunately, no put options are traded on XYZ Company.
Required:
a. Suppose the desired put option were traded. How much would it cost to purchase?
b. What would have been the cost of the protective put portfolio?
c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put
with X=102? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective
put.
Complete this question by entering your answers in the tabs below.
Required A
Required B
Required C
What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective
put with X=102? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired
protective put.
Note: Do not round intermediate calculations. Round your final answer to 2 decimal places.
Portfolio
Buy 0.5 shares
Invest in T-bills
Total
S=94.86
S=109.14
Show less A
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