Collar, Financial Management

Assignment Help:

Collar

A collar can be established by holding a share, along with purchasing a protective put and writing a covered call, where both options at out-of-money..

For Example - ONGC

Underlying stock = Rs. 809

Buy Mar Rs. 800 Put @ Rs.16

Write Mar Rs. 880 Call @ Rs.7.25

 

Total price for this strategy = 809 + 16 + 7.25 = Rs. 832.25

 

Maximum Profit: Limited

Call strike - Initial spot price - Put Premium = 880 - 809 - 16 = Rs. 55

Maximum Loss: Limited

Initial spot price - Put strike + Call Premium = 809 - 800 + 7.25 = Rs. 16.25

So an arbitrage opportunity to the tune of Rs. 55 (max) is available if the price target of Rs. 880 or beyond is achieved. On the flip side, we have losses, which are capped at a maximum of Rs 16.25 for price Rs. 800 and below.


Related Discussions:- Collar

How will you conclude the cost of capital, Q. How will you conclude the cos...

Q. How will you conclude the cost of capital from different sources? Ans. Implication of Cost of Capital: - Cost of capital of a firm is the least rate of return expected by it

risk/return profile of the convertible security, Let us consider thr...

Let us consider three scenarios of changes in stock prices and look into the risk return profile of the convertible security. Let us assume that the stock prices

Beta, what is the value of beta for this fund ? If the benchmark index for ...

what is the value of beta for this fund ? If the benchmark index for this mutual fund increased by 11.00% during the period covered by beta measure, what was the rate of return for

Why firms need funds at certain episodic events, Why firms need funds at ce...

Why firms need funds at certain episodic events A related aspect was that firms need funds at certain episodic events like merger, reorganization, liquidation and soon. A detai

Financial management in marketing department, Q. Financial Management in Ma...

Q. Financial Management in Marketing Department? The marketing department of a firm is concerned with the ultimate activity of the firm Le. the selling of goods and services to

Income statement, Income Statement A formal statement of the parts...

Income Statement A formal statement of the parts used in determining an organization net income that is called profit and loss statement. The several categories reported

Describe factors to analyze a company position, Q. Describe Factors to Anal...

Q. Describe Factors to Analyze a Company position? - Venture capitalists may be involved in the business because of its significant growth but poorly structured finance. An equ

State the concept of icq, ICQ's designed to: Identify possible area...

ICQ's designed to: Identify possible areas of weakness. Discover existence of internal controls. Questions are framed to highlight situations where: NO su

What is deposit method, Q. What is Deposit Method? Deposit Method - Rel...

Q. What is Deposit Method? Deposit Method - Related to sales of real estate, under this method seller doesn't recognize any profits, doesn't record a note RECEIVABLE and contin

Advantage to corporation of investing in working capital, What is the prima...

What is the primary advantage to a corporation of investing some of its funds in working capital?  By investing in working capital a firm acquires the liquidity it needs helpin

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd