Explain when an investor is likely to use this collar strategy.

The price of a stock is currently $30. The price of a two-year European call option on th Show more Question 1 The price of a stock is currently $30. The price of a two-year European call option on the stock with a strike price of $40 is $15 and the price of a two-year European put option on the stock with a strike price of $20 is $12. a. Suppose that an investor buys 100 shares of stock shorts 100 call options and buys 100 put options. Construct a table showing the investors profit (not payoff) as a function of the stock price at expiration. The difference between profit and payoff is explained in week 1. In addition please remember that when the investor shorts an option he receives the option price upfront. For example if you short sell 1 call option you will receive $15 today. Hints: To answer part a construct a column in Excel of stock prices at expiration ranging from $1 to $60 in increments of $1. Then use the next 3 columns to calculate the stock call put profits (one column for each position). Pay attention to whether the investor is taking a long or a short position of the option. Then add all the profits from these three positions (stock call put). Finally use Excel to graph the portfolio profit (y-axis) as a function of stock price (x-axis). Specifically use scatterplot in Excel. If you dont know how then type scatterplot in Excel help and follow the instruction. Your profit for long put option should look similar to Figure 9.2 in page 213 and the profit for short call should look similar to Figure 9.3. b. The set of actions in part a is called a collar strategy. Explain when an investor is likely to use this collar strategy. c. Suppose now that the investor buys 100 stocks shorts 200 call options and buys 200 put options. Construct a table showing the investors profit or loss as a function of the stock price at expiration. Graph the portfolio profit as a function of stock price. The total profit should look like a zigzag (down/up/down) pattern. Question 2 What are the differences between (a) exchangetraded call options and (b) warrants/employee stock options/convertibles? Question 3 If you exercise an inthemoney call option you will make a profit. Explain whether this is true or false. Show less

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