Calculate the total profit or loss at expiration

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Reference no: EM133633472

In the offices of Meridian Capital, a boutique investment firm known for its creative investment strategies, a seasoned portfolio manager named Jordan has just pitched a novel idea to the investment committee. The firm has recently taken a bullish position on a pioneering biotech company, GenHeal Inc., which is on the brink of a breakthrough with its gene therapy treatment. They have purchased one hundred shares at $200 per share, investing $20,000 in the company.

However, understanding the volatile nature of biotech stocks, especially with upcoming FDA approval decisions, Jordan proposes buying an August 175 put option contract (representing one hundred shares) as a hedge. The put option costs $10 per share, amounting to a total of $1,000 for the contract. The firm decided to hold this position until expiration in August, intending to protect against downside risk while participating in the upside potential.

Consider the following additional factors

Regulatory Review: The FDA review of GenHeal's gene therapy scheduled before the put option's expiration. Positive news could skyrocket the stock, while a rejection could lead to a steep decline.

Market Sentiment: The biotech sector is facing investor scrutiny due to policy debates on drug pricing, adding another layer of market sentiment-driven volatility.

Competitor Dynamics: A competitor, HealGenix, is rumored to announce its own therapeutic discovery, which could impact GenHeal's stock price regardless of the FDA outcome.

Financial Results: GenHeal is also due to release its quarterly earnings one month before the put option's expiration. This could significantly influence the stock price.

Question:

Determine Profits: Calculate the total profit or loss at expiration, factoring in the stock price movement and the value of the put option.

Reference no: EM133633472

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