Suppose you have short position in 100 shares of Microsoft stock, ticker MSFT. You plan to...
Suppose you have short position in 100 shares of Microsoft stock, ticker MSFT. You plan to close out the position in July 2018 and want to limit the cost of the closeout to no more than $95 per share. You do not want to use a forward contract.
a) What option would you purchase to guarantee this outcome?
b) How much would it cost? Explain how you got your answer.
Homework Answers
(a) We would purchase a call option ie option to buy of $95
(b) Option Value Compries of two Elements ie Intrinsic value and Time value of money
If current Market price is Less than 95 , Intrinsic Value of option would be zero
If Currect Price is more than 95, Intrinsic value would be Market Price less $95
TIme value fo money is basicaly cost of carrying and would be based on Maturity date etc
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