Benefits of building a collar strategy, Corporate Finance

a)    Put options on Chicken King with a strike price of $42.50 and 2 months to maturity are properly priced to sell for $3.68 (no bid-ask spread).  Call options with the same strike and maturity are selling for $0.88.  If the current price of Chicken King's stock is $39.75 and the risk-free rate is 4% p.a., explain how you can profit from the situation without taking on any net risk to yourself.

b)    Compare the costs and benefits of building a collar strategy to hedge a short risk exposure vs. just buying a call option.  What factors would influence your choice between the two strategies?

c)    Why aren't most options exercised before expiration, even when they are in the money?

 

 

Posted Date: 2/27/2013 6:35:50 AM | Location : United States







Related Discussions:- Benefits of building a collar strategy, Assignment Help, Ask Question on Benefits of building a collar strategy, Get Answer, Expert's Help, Benefits of building a collar strategy Discussions

Write discussion on Benefits of building a collar strategy
Your posts are moderated
Related Questions
You are required to provide an essay or report of approx 500 words or less (excluding attachments and references),  accompanied by relevant calculations, in MS Word orPDF format ac

This method simply calculates the average of a number of expert estimates. Let E denote the number of experts, and mn,e denote the forecast of expert e, e =1, ... ,E, for SKU n 2N.

Assume that there are two firms, firm A and firm B. The firms have identical present values at £10,000 and an identical future value profile as given in the picture below. The prob

Think of any business you would like to open in Lebanon (from small to big project) and prepare a preliminary income statement from five to eight years maximim. Compute the expecte

An investment under consideration has a payback of seven years and a cost of $320,000. If the required return is 12 percent, What is the worst-case NPV? Explain...

Your boss is trying to figure out when to replace an important piece of machinery in your main production facility.  The Siemens NR550, costs $5.45 million brand new and generally

Two years ago, Homeless People Ltd needed to accumulate a total of $600,000 by the end of four years to acquire new facility to house the homeless people in the city.  To do so, Ho

I have been given 3 different types of projects. They state the IRR and how much the project will add. The question goes on to give a WACC with break points. The question wants

Question: (a) According to Modigliani and Miller's Theory of Capital Structure (1963), companies should make maximum use of gearing. Briefly, describe factors which might pr

is cash considered to be additive to this method of valuation?