What is the actual cost of the above strategy

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Reference no: EM132038777

The current price of a stock you are holding is $80. You want to continue to hold the stock position but modify it (by including bond holding) so that the resulting portfolio value never drops below $72. The rate of simple interest for the period is 10%.

If the stock may move up to $104 or down to $64 after one period, how do you modify our initial holding of $80 so as to make sure that it is at least worth $72 at the end of the period? The rate of simple interest for the period is 10%.

What is the actual cost of the above strategy? Hint: What is your terminal payoff when the stock moves up?

Reference no: EM132038777

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