You currently manage a pension fund which owns 500,000 units of Coca-Cola shares and the...
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You currently manage a pension fund which owns 500,000 units of Coca-Cola shares and the current price is $41.50 per share. You are concerned that the share price may decline sharply in the next two months and you want to protect the portfolios value. Call options are available at a strike price of $45 per share. The cost of each call option is $0.01 per share. Put options are also available at a strike price of $40.00. The cost of the put option on each share is $0.02
i) What type of options would you utilize and what is the total cost of your hedging strategy? (3 marks)
ii) Determine the decision you would make if the price of the share fell to $39.00 per share. Justify your decision with supporting calculations (3 marks)
iii) Determine the decision you would make if the price of the share fell to $41.00 per share. Justify your decision with supporting calculations (3 marks)
You currently manage a pension fund which owns 500,000 units of Coca-Cola shares and the current price is $41.50 per share. You are concerned that the share price may decline sharply in the next two months and you want to protect the portfolios value. Call options are available at a strike price of $45 per share. The cost of each call option is $0.01 per share. Put options are also available at a strike price of $40.00. The cost of the put option on each share is $0.02
i) What type of options would you utilize and what is the total cost of your hedging strategy? (3 marks)
ii) Determine the decision you would make if the price of the share fell to $39.00 per share. Justify your decision with supporting calculations (3 marks)
iii) Determine the decision you would make if the price of the share fell to $41.00 per share. Justify your decision with supporting calculations (3 marks)
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