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THIS IS ALL ONE QUESTION THANK YOU Luigi would like to hold a protective put...

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Finance

THIS IS ALL ONE QUESTION THANK YOU

Luigi would like to hold a protective put position on the NintendoX Co. stock to lock in a guaranteed minimum value of $50 at year-end. NintendoX currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on NintendoX Co.

a. Suppose the desired put options with X = 50 were traded. What would be the hedge ratio for the option?

b. Form a portfolio of one share of stock and 2 shares of puts. What is the (nonrandom) payoff to this portfolio at t=1? Suppose the desired put options with X = 50 were traded.

c. Suppose the desired put options with X = 50 were traded. How much would it cost to purchase the put option? (4 points)

d. What would have been the cost of a protective put portfolio?

e. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = $50? (Hint: the goal is a portfolio with the same exposure to the stock as the protective put portfolio.)

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