Benefits of building a collar strategy, Corporate Finance

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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?

 

 


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