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Summary Derivative Markets.docx Derivative Markets Strayer University FIN550 Corporate Investment Analysis Derivative Markets Chapter 14: Problems 3(a-c), 5(a-c), 8(a-c), 9, and 10(a-c) 3. Suppose that an investor holds a share of Sophia common stock, cu$7.49
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Summary Derivative Markets.docx Derivative Markets Strayer University FIN550 Corporate Investment Analysis Derivative Markets Chapter 14: Problems 3(a-c), 5(a-c), 8(a-c), 9, and 10(a-c) 3. Suppose that an investor holds a share of Sophia common stock, cu
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Derivative M Derivative Markets Strayer University FIN550 Corporate Investment Analysis Derivative Markets Chapter 14: Problems 3(a-c), 5(a-c), 8(a-c), 9, and 10(a-c) 3. Suppose that an investor holds a share of Sophia common stock, currently valued at $50. She is concerned that over the ne...
derivative marketsdocx derivative markets strayer university fin550 corporate investment analysis derivative markets chapter 14 problems 3a c
5a c
8a c
9
and 10a c 3 suppose that an
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1
Derivative Markets
Strayer University
FIN550 Corporate Investment Analysis
, 2
Derivative Markets
Chapter 14: Problems 3(a-c), 5(a-c), 8(a-c), 9, and 10(a-c)
3. Suppose that an investor holds a share of Sophia common stock, currently valued at $50.
She is concerned that over the next few months the value of her holding might decline, and
she would like to hedge that risk by supplementing her holding with one of three different
derivative positions, all of which expire at the same point in the future:
1. The short position in a forward with a contract price of $50: We must assume that a
Short forward is when the Forward contract holder is the seller and interpreted that
there is no initial premium.
2. The long position in a put option with an exercise price of $50 and a front-end
premium expense of $3.23: We see a long Put when the holder has the option to
purchase the Put option long-term. Therefore, at the expiration date, if the market
price is less than the contract price, the holder can exercise the option if, the
expiration date of the market price exceeds the contract price, the holder does not
exercise the option.
3. Understanding that a short position in a call option with an exercise price of $50 and a
front-end premium receipt of $5.20, the Short Call holder sells the call option at an
exercise price of $50 and receives a premium of $5.20, and is considered as the writer
of the call option.
a. By using a table similar to the following, we are able to calculate the expiration
date value of the investor’s combined (stock and derivative) position. However, in
calculating net portfolio value, we would ignore the time differential between the
initial derivative expense or receipt and the terminal payoff.
, 3
b. We see each of the three hedge portfolios, graph the expiration date value of
Sophia combined position on the vertical axis, with the potential expiration date
sharing the prices of Sophia stock on the horizontal axis.
c. C Assuming that the options are priced fairly, use the concept of put–call parity to
calculate the zero-value contract price (F0,T) for a forward agreement on Sophia stock.
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