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Godty Godty
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1 months ago
Alan just bought 100 shares of Global, Inc. (GLO) at $45 per share and as protection he also bought a three-month put with a $45 strike price at a cost of $400. One of two scenarios is expected to occur in the next three months: (a) GLO stock declines to $33; and (b) GLO stock rises to $61. Calculate the profit or loss under each scenario and explain how the hedge has provided protection for Alan's position in GLO. Ignore transaction costs.
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Fundamentals of Investing


Edition: 14th
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rick32rick32
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1 months ago
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Cost of GLO = ($45)(100) = $4,500
Cost of put = $400
In three months:
(a)GLO at $33
 Total loss = {($45 - $45)(100)} - $400 = $-400
(b)GLO at $61
 Total gain = {($61 - $45)(100)} - $400 = $1,200
At a cost of $400, Alan minimized his loss under scenario (a) to $400, which is less than the $1,200 he would have lost holding GLO stock only. For this downside protection, Alan gave up $400 and reduced his profit in scenario (2) to $1,200 rather than the $1,600 he would have earned by holding only the GLO stock. The hedge reduced his risk by lowering his potential return.

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