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Calculate the breakeven point of the option

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Question - Tina believes that due to COVID-19 the share price of a bank, Morecash Ltd, is expected to fall in the next few months. Tina is concerned as she holds Morecash shares in her portfolio and does not want the value of her share portfolio to decrease. Tina finds a put option with an expiry of 3 months, an exercise price of $25 and a premium of $1.20. The current share price of Morecash Ltd is $30.00.

Required -

1. In order for Tina to protect the value of her share portfolio, should she buy or sell the put option?

2. Explain when Tina would exercise the option.

3. Calculate the breakeven point of the option.

4. Could Tina use a forward contract to hedge against the risk of her portfolio value decreasing? Explain.

Reference no: EM133157735

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