Question

A Canadian investor owns 300 shares of Scotiabank (BNS) and wants to protect herself against a large drop in the stock’s price between now and the end of the year.

i. Should she buy BNS stock put options or call options?

ii. To protect herself with a maximum loss of about 10% below the current market price, what strike price should she choose?

iii. What expiry date should she choose?

iv. How many contracts would she need to buy?

v. How much would it cost her to acquire this hedge based on the “ask” price of the options? (ie what would be the total cost of the option contract(s) premium?) Attach a screenshot of the appropriate option’s trading price.

vi. What is the current price of Scotiabank (BNS) shares and what are her 300 shares currently worth? What percentage of that value would she have to spend to hedge with options?

HINTS:

• Go to the Montreal Exchange website (https://www.m-x.ca/nego_cotes_en.php?symbol=bns*) and find the appropriate Scotiabank option (call or put) with the appropriate strike price and expiry date.

• Each option contract is for 100 shares

• The Bid & Ask prices are PER SHARE not per contract

) and find the appropriate Scotiabank option (call or put) with the appropriate strike price and expiry date.

• Each option contract is for 100 shares

• The Bid & Ask prices are PER SHARE not per contract

Answer 1

As HOMEWORKLIB's policy only the first 4 sub-parts are answered

Given information:

Canadian investor owns 300 shares of Scotiabank (BNS) and wants to protect herself against a large drop in the stock’s price between now and the end of the year

Sub part 1:

To protect herself against a large drop in the stock’s price, the investor should buy put options, as these options will give her the right to sell the stock at a predetermined price within a pre-determined period.

whereas call option gives the right to buy the stock. At this stage the investor already has the stock and doesnt need to buy more.

Hence, the answer is "she should buy BNS stock put options"

Sub part 2:

To protect from a drop of 10%, the strike price should be atleast 10% lower than today's stock price. Hence the strike price should be = St - 10% *St = (1-10%) * St where St is today's stock price

Hence if the stock price is 100 then the strike price should be 100 - 100*10% = 90

Sub part 3:

Since the investor needs protection till the end of the year. The expiry date should be the end of the year.

Sub part 4:

Each contract is for 100 shares. The investor has 300 shares. Hence she will need to buy 300/100 = 3 put option contracts