Imagine that you are holding 5,000 shares of stock, currently selling at $40 per share. You are ready to sell the shares but wouldprefer 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 thatthe stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal ofadditional funds. January call options with a strike price of $45 are selling at $2, and January puts with a strike price of $35 are sellingat $3. Assume that you hedge the entire 5,000 shares of stock.Required: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?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?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?a. Portfolio Valueb. Portfolio Valuec. Portfolio Value

a) $170,000b) $195,000c)$220,000Explanation: Calculate the value of portfolio (net proceeds from the…

Answered: Imagine that you are holding 5,000…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You consider buying a share of stock at a price of $950. The stock is expected to pay a dividend of $10 next year, and your advisory service tells you that you can expect to sell the stock in 1 year only for $945. What is the expected rate of return?
You are considering purchasing a stock with a $100 per year dividend and expected price in two years of $500. Your personal required return is 15%. This is only two periods, so do not drop out the expected selling price as you would for a long holding period. (a) What is your personal willingness to pay for this stock? (b) The current market price of this stock is $600. Should you buy it? (c) Now keep the current market price, expected price, holding period, and personal required return constant. Solve for the break-even dividend (e.g. the dividend at which you are indifferent between buying and not buying the stock today) assuming the dividend is constant over time. (d) Now assume everyone know that the initial dividend in t + 1 is $120. What is the growth rate necessary in the Gordon model for you to buy the stock? (e) Finally, assume you buy the stock at the price and conditions you found in part (a) and sell it at $500. What is your rate of return?
You strongly believe that the price of Breener Inc. stock will rise substantially from its current level of $137, and you are considering buying shares in the company. You currently have $13,700 to invest. As an alternative to purchasing the stock itself, you are also considering buying call options on Breener stock that expire in three months and have an exercise price of $140. These call options cost $10 each. a. Compare and contrast the size of the potential payoff and the risk involved in each of these alternatives. b. Calculate the three-month rate of return on both strategies assuming that at the option expiration date Breener's stock price has (1) increased to $155 or (2) decreased to $135. c. At what stock price level will the person who sells you the Breener call option break even? Can you determine the maximum loss that the call option seller may suffer, assuming that he does not already own Breener stock?
You are considering two investment alternatives. The first is a stock that pays quarterly dividends of $0.45 per share and is trading at $26.16 per share; you expect to sell the stock in six months for $30.09. The second is a stock that pays quarterly dividends of $0.61 per share and is trading at $37.12 per share; you expect to sell the stock in one year for $38.65. Which stock will provide the better annualized holding period return? The 1-year HPR for the first stock is%. (Enter as a percentage and round to two decimal places.)
You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $109 at year- end. XYZ currently sells for $109. Over the next year the stock price will increase by 12% or decrease by 12%. The T-bill rate is 6%. Unfortunately, no put options are traded on XYZ Co. a. Suppose the desired put option were traded. How much would it cost to purchase? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost to purchase b. What would have been the cost of the protective put portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.) 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 = 109? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put. (Do not round…
you are considering the purchase of zee company stock. you anticipate that the company will pay dividends of $3.50 per share next year and $4.00 per the following year. you believe that you can sale the stock for $20.00 per share two years from now. if your required rate is 10 percent, what is the maximum price that you would pay for a share of Zee company stock? Please don't provide answer in image format thank you
You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $210 at year-end. XYZ currently sells for $210. Over the next year, the stock price will either increase by 10% or decrease by 10%. The T-bill rate is 4%. Unfortunately, no put options are traded on XYZ Company. Required: a. How much would it cost to purchase if the desired put option were traded? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Cost to purchase b. What would be the cost of the protective put portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Cost of the protective put portfolio
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You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $1.50 in dividends and $26 from the sale of the stock at the end of the year. What is the maximum price you would pay for the stock today if you wanted to earn a 15% return? Give typing answer with explanation and conclusion
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Suppose that you plan to invest in stock A, because you believe that stock A will appreciate in the next 6 months. The stock current price is $100, and a call option on stock A expiring in 6 months has an exercise price of $100 selling at $15 per option. And you have $7500 in hand to invest the following three strategies: A: Invest entirely in stock A. B: Invest entirely in call option on stock A. C: Buy call options the amount of calls is same as the number of shares we purchase in strategy A, and invest the remaining money in T-bills at interest rate whose annual interest rate is 10%. Suppose that the possible stock price are $90, $100, $110, and $120. (a) At expiration (after 6 months), compute the rates of return for each strategy given different possible stock prices. We don't consider the premium we’ve paid for holding call options in this case. (b) Given different stock price at expiration, which strategy would you like to choose? For example, if the stock price is $90, which…

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