On December 1,2008,Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share.Winston classifies them as available-for-sale securities.On this same date,it decides to hedge against a possible decline in the value of the securities by purchasing,at a cost of $250,an at-the-money put option to sell the 100 shares at $40 per share.The option expires on February 20,2009.Selected information concerning the fair values of the investment and the options follow:
Assume that Winston exercises the put option and sells Linked shares on February 20,2009.

-Based on the preceding information,what is the market price of Linked Corporation stock on December 31,2008?
A)$40
B)$37
C)$36
D)$38

Question

On December 1,2008,Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share.Winston classifies them as available-for-sale securities.On this same date,it decides to hedge against a possible decline in the value of the securities by purchasing,at a cost of $250,an at-the-money put option to sell the 100 shares at $40 per share.The option expires on February 20,2009.Selected information concerning the fair values of the investment and the options follow:
Assume that Winston exercises the put option and sells Linked shares on February 20,2009.
 
-Based on the preceding information,what is the market price of Linked Corporation stock on December 31,2008?
A)$40 
B)$37 
C)$36 
D)$38

Quizplus · Accepted Answer

The cost of the put option ($250) and the strike price ($40) suggest that Winston expects the stock price to potentially decline below $37 by February 20, 2009. This indicates that the market price of Linked Corporation stock on December 31, 2008, may have been lower than the purchase cost of $40 per share. Therefore, the best choice is B) $37.

On December 1,2008,Winston Corporation Acquired 100 Shares of Linked Corporation