Reference no: EM131687435

Assignment: Derivatives & Risk Management

Case

Part 1:

After years of working his way up the ranks from an analyst, Gordon Gecko just received a promotion to portfolio manager. He has been assigned to manage a $25 million portfolio of U.S. Large Cap stocks that uses the S&P 500 Index as its benchmark. He has not worked on this portfolio as an analyst so it is the first time he has had a chance to begin reviewing the portfolio. It will take him some time to review the holdings and formulate his strategy. The U.S. election has caused a rally in the stocks and Gordon is concerned that the stock market valuations.

Below is the call and put options for SPY (an ETF that tracks the S&P 500 index). One option contract is equal to 100 shares. SPY is currently trading at $254.60. What issues is Gordon facing and what are the near-term risk? How can Gordon use options to help him as he manages his portfolio? In your recommendation, show the costs (premiums) and discuss break-even scenarios?

Part 2:

Gordon just received a phone call from his parents and they informed him that his grandmother has passed away.

In her will, she has given Gordon 1,000 shares of Exxon Mobil stock (ticker = XOM). Since it is an inheritance, his cost basis is stepped up to the date of death and equals $82.52. So he does not have to worry about paying taxes on any gains if he decides to sell the stock immediately. However, his grandmother had held the stock for a long time and had hinted she would like Gordon to hold on to it. What strategies can Gordon pursue with his Exxon shares? Below is some of the call and put options quotes that are currently available. Discuss costs, risks, and gain/loss potential.

Attachment:- Derivatives-Case.rar