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Course:- Finance Basics
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case problem 14.2

a little more than 10 months ago, luke bought 300 shares of stock at $40 per share. Since then, the price of the stock has risen to $75 per share. it is now near the end of the year, and the market is starting to weaken. luke is informed that the needed puts are indeed available on his stock. secifically, he can buy 3 month puts, with $75 strike prices, at a cost of $550 each (quoted at $5.50).

a. given the circumstance surrounding lukes's current investment position, what benefits could be derived from using the puts as a hedge device? what would be the major drawback?




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