26 Jul WHAT WOULD BE THE FORWARD PRICE?
Adam a manager at Financial Economics Inc.(FEI) received 10000 shares of company stock as part o Show more Adam a manager at Financial Economics Inc.(FEI) received 10000 shares of company stock as part of his compensation package. The stock current sells at $60 a share. Adam would like to defer selling the stock until the next tax year. In January however he will need to sell all his holdings to provide for a down payment on his new house. Adam is worried about the price risk involved in keeping his shares. If the value of his stock holdings falls below $550000 his ability to come up with the necessary down payment would be jeopardized. Assume annual risk free rate is 0. Conside the following four strategies: 1. Pedro suggests him go short forwards. What would be the forward price? Draw the payo function of Adams portfolio in January using this strategy? 2. Xing suggests him short January call options on the FEI shares with strike price $65. These calls are currently selling for $6 each. Draw the payo function of Adams portfolio in January using this strategy? 3. Sung Bin suggests him long January put options on FEI with strike price $55. These options also sell for $6 each. Draw the payo function of Adams portfolio in January using this strategy? 4. Erin suggests him establish a zero-cost collar by shorting the January calls and longing the January puts. Draw the payo function of Adams portfolio in Januaryusing this strategy? 5. Evaluate each of these strategies given the scenario described above. Which strategies would Adam like better? Show less
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