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Karen Kline purchased 200 shares of Mex Inc. common stock for $15 per share exactly two years ago, in December 2017. Today, December 15, 2019, the stock is selling for $25 per share. Because Karen strongly believes that the stock is fully valued in the market, she wishes to sell it and invest the proceeds in the stock of an attractive emerging company. Karen, who is in the 22% tax bracket, realizes that if she sells the stock prior to year-end, the capital gain of $2,000 (200 shares x ($25 sale price - $15 purchase price)] will result in taxes for 2019 of $300 (0.15 * $2,000). Because Karen would like to lock in her $2,000 profit but defer the tax on it until 2020, she plans to investigate the strategies available for accomplishing this objective. a. If Karen can purchase 2 put options on Mex Inc.'s stock at a contractual sale price of $25 for a total cost of $152 ($76 per 100-share option), what will her after-tax position be if the stock price declines to $23 per share? Will Karen be able to benefit from any future increases in Mex Inc.'s stock price using this put hedge strategy? b. If Karen can sell 2 call options on Mex Inc.'s stock with a contractual buy price of $23 and 6-month maturity for $528 ($264 per 100-share option) when the stock is selling for $25 per share, what will her after-tax position be if the stock price declines to $23 per share? Will Karen be able to benefit from any future increases in Mex Inc.'s stock price using this deep-in-the-money call option strategy? Is the price of $25 fully locked in using this strategy? c. Use your findings in parts a and b to compare and contrast the 2 strategies. Then recommend a strategy to Karen, assuming the stock price does drop below the current price. a. If Karen purchases 2 put options on Mex Inc.'s stock, her after-tax position, if the stock price declines to $23 per share, is $ . (Round to the nearest cent.) benefit from future price increases, because she V have to exercise the put option if the price goes up. (Select With this put option strategy, Karen from the drop-down menus.) b. If Karen sells 2 call options on Mex Inc.'s stock and the stock price declines to $23 per share, her after-tax position is $ . (Round to the nearest cent.) With this call option strategy, Karen benefit from future price increases, because she have to sell the shares if the price goes up and the buyer exercises the call options. Furthermore, the protection extends only to the amount received for the option. (Select from the drop-down menus.) c. Use your findings in parts a and b to compare and contrast the 2 strategies. Which strategy will you recommend to Karen, assuming the stock does drop below the current price to $23? (Select the best answer below.) Karen Kline purchased 200 shares of Mex Inc. common stock for $15 per share exactly two years ago, in December 2017. Today, December 15, 2019, the stock is selling for $25 per share. Because Karen strongly believes that the stock is fully valued in the market, she wishes to sell it and invest the proceeds in the stock of an attractive emerging company. Karen, who is in the 22% tax bracket, realizes that if she sells the stock prior to year-end, the capital gain of $2,000 (200 shares x ($25 sale price - $15 purchase price)] will result in taxes for 2019 of $300 (0.15 * $2,000). Because Karen would like to lock in her $2,000 profit but defer the tax on it until 2020, she plans to investigate the strategies available for accomplishing this objective. a. If Karen can purchase 2 put options on Mex Inc.'s stock at a contractual sale price of $25 for a total cost of $152 ($76 per 100-share option), what will her after-tax position be if the stock price declines to $23 per share? Will Karen be able to benefit from any future increases in Mex Inc.'s stock price using this put hedge strategy? b. If Karen can sell 2 call options on Mex Inc.'s stock with a contractual buy price of $23 and 6-month maturity for $528 ($264 per 100-share option) when the stock is selling for $25 per share, what will her after-tax position be if the stock price declines to $23 per share? Will Karen be able to benefit from any future increases in Mex Inc.'s stock price using this deep-in-the-money call option strategy? Is the price of $25 fully locked in using this strategy? c. Use your findings in parts a and b to compare and contrast the 2 strategies. Then recommend a strategy to Karen, assuming the stock price does drop below the current price. a. If Karen purchases 2 put options on Mex Inc.'s stock, her after-tax position, if the stock price declines to $23 per share, is $ . (Round to the nearest cent.) benefit from future price increases, because she V have to exercise the put option if the price goes up. (Select With this put option strategy, Karen from the drop-down menus.) b. If Karen sells 2 call options on Mex Inc.'s stock and the stock price declines to $23 per share, her after-tax position is $ . (Round to the nearest cent.) With this call option strategy, Karen benefit from future price increases, because she have to sell the shares if the price goes up and the buyer exercises the call options. Furthermore, the protection extends only to the amount received for the option. (Select from the drop-down menus.) c. Use your findings in parts a and b to compare and contrast the 2 strategies. Which strategy will you recommend to Karen, assuming the stock does drop below the current price to $23? (Select the best answer below.)

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