What is the effect of the collar

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Black-Scholes and Collar Cost An investor is said to take a position in a "collar" if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two options should have the same time to expiration. Suppose Marie wishes to purchase a collar on Hollywood, Inc., a non-dividend-paying common stock, with six months until expiration. She would like the put to have a strike price of $60 and the call to have a strike price of $90. The current price of Hollywood's stock is $75 per share. Marie can borrow and lend at the continuously compounded risk-free rate of 5.5 percent per annum, and the annual standard deviation of the stock's return is 45 percent. Use the Black- Scholes model to calculate the total cost of the collar that Marie is interested in buying. What is the effect of the collar?

Reference no: EM131424404

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