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What is hedging strategy

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Reference no: EM132057328

Hedging: example using options

Context :

Consider an investor who in May of a particular year owns 1 Microsoft shares, purchased at the current price of $28 per share.

The investor is concerned about a possible share price decline in the next 2 months and wants protection by buying a call or put option

The following 2-month options are available in the market :

Call, strike price of $24, premium of $4.5

Call, strike price of $28.5, premium of $1

Put, strike price of $25, premium of $0.2

Put, strike price of $27.5, premium of $1

Question:

A: What hedging strategy could you advise to the investor in order to hedge his risk of a possible Microsoft share price decline ? Should the investor buy a call or a put?

B: For each one of these 2 puts :

What will be the diagram of the overall net payoff?

What will be the formula for the overall net payoff?

What is the breakeven share price between these 2 options (calls or puts)

What option would you recommend?

Reference no: EM132057328

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