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Question 5 The date is august 2012. You are a stockbroker at a large Australian...

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Finance

Question 5

The date is august 2012. You are a stockbroker at a large Australian firm and specialize in dealing in derivative markets. As part of your daily routine, you discuss a range of opportunities and strategies with clients. You take a call from an investor who has decided to set up a buy/write fund, which is not allowed to gear/lever. Her strategy is to buy and always hold BHP shares and write options against the holding. She also states that the fund will earn over 20% per annum over the next year with no risk of loss.

(i) What type of option trades would the investor seek to enter into, given that she is already holding BHP shares? Justify your answer. (4mks)

(ii) Discuss the investors comment as to no risk of loss with reference to what assumptions would be required to make this statement true and what will generate the return from the strategy. (4mks)

(iii) Outline a strategy that would give a similar result to that outlined above but using different types of options and underlying security. (2mks)

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