Indicate the advantages and disadvantages of each strategy

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Reference no: EM132015012

One of your classmates just accepted a job offer and as part of her signing bonus, she was given 10,000 shares of the company. The company’s stock currently sells for TL40. Your friend would like to hold on to these stocks for one year. At the end of one year in April 2019, she would like to sell all her stock holdings so that she can use the money as a down payment for an apartment. Your friend is worried about the stocks losing value over the course of the next year. She believes that if the stock price falls below TL35, she would not have enough funds to make the down payment. She also believes that if the stock price rises above TL45, she would be able to use the extra funds to buy a car. Suppose that your friend is considering the following investment strategies:

1. Go short in April 2019 call options with an exercise price of TL45. The call premium is TL3.

2. Go long in April 2019 put options with an exercise price of TL35. The put premium is TL3.

3. Form a zero-cost collar by shorting the April calls and going long in the April puts.

Evaluate each of these strategies in terms of their appropriateness for your friend’s goal. Indicate the advantages and disadvantages of each strategy. Make a recommendation to your friend.

Reference no: EM132015012

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