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Ed Martin the pension fund manager for Stark Corporation is considering purchase of a put option in anticipation of a price decline in the stock of Carlisle Inc The option to sell 100 shares of

Ed Martin, the pension fund manager for Stark Corporation, is considering purchase of a put option in anticipation of a price decline in the stock of Carlisle, Inc. The option to sell 100 shares of Carlisle, Inc., at any time during the next 90 days at a striking price of $45 can be purchased for $380. The stock of Carlisle is currently selling for $46 per share. a. Ignoring any brokerage fees or dividends, what profit or loss will Ed make if he buys the option and the lowest price of Carlisle stock during the 90 days is $46, $44, $40, and $35? b. What effect would the fact that the price of Carlisle’s stock slowly rose from its initial $46 level to $55 at the end of 90 days have on Ed’s purchase? c. In light of your findings, discuss the potential risks and returns from using put options to attempt to profit from an anticipated decline in share price.

 

May 01 2020 View more View Less

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