Question

26. purchased a stock index fund at $1200 per share. To protect his loss, he also purchased an at-the-money European put optio "an at-the-money European put option the fund for S60 with three- time to expiration. Suppose stock price on the expiration day is 1400, What's Joe's expected return on his investment? 1) -12% 2) 4.8% 3) 11.1% 4) 66.7% 5) 3.17% 27. Joe purchased a stock index fund at $1200 per share. To protect his loss, he also purchased an at-the-money European put option the fund for $60 with three- month time to expiration. Suppose stock price on the expiration day is 1400 with probability of 50% and 1000 with probability of 50%. What's Joe's expected return on his investment? 1) -12% 2) 4.8% 3) 11.1% 4) 66.7% 5) 3.17%

Answer 1

Solution :- ( 26 )

Investment in Stock Purchase = $1200

Stock at expiration date = $1400

So Profit on Share = $200

Now in case of Put Option

As it is At the Money which means Strike Price is equal to Current Market Price that is $1200

Now at expiration stock price is greater than strike price so no need to exercise put option

Simply loss of Premium of $60

Now

Total Initial Investment = $1200 + $60 = $1260

Money Return in 3 months = $1400

Therefore net benefit = $1400 - $1260 = $140

Therefore expected return on investment = $140 / $1260 = 0.111 = 11.1%

Therefore Correct answer is (3) that is 11.1%

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