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An investment company has a short position in 50,000 shares of a common stock, which...

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Finance

An investment company has a short position in 50,000 shares of a common stock, which it took a few months ago at a price of $50 per share. Today, the price per share of the stock is $30 per share. Suppose the investment company hedges against the price risk by buying today 500 European call options on the same stock. Today, the call premium is $1.0 per share, the exercise price is $32 per share and expiration date is after six months. Ignoring the time value of money, required in compounding the call premium paid today to the expiration date, and noting that size of each call is 100 shares, answer the following questions:

(i) Calculate profit (loss) of the investment company from its total position in the stock at each of the following levels of the spot price of the stock on the expiration date: (8 marks) (a) $60 (b) $20 (c) $10

(ii) Does buying calls against the short position in the stock provide a partial hedge or a full hedge? (2 marks)

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