Bill Jones inherited 5,000 shares of stock priced at $45 per share.He does not want to sell the stock this year due to tax reasons but he is concerned the stock will drop in value before year end.Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain.January call options with a strike of $50 are quoted at a cost of $2 and January puts with a $40 exercise price are quoted at a cost of $3.If Bill establishes the collar and the stock price winds up at $35 in January,Bill's net position value including the option profit or loss and the stock is _________.

Question

Quizplus · Accepted Answer

The correct answer is A.The stock is worth $35 per share, so Bill will lose $10 per share, or $50,000 total. However, he will make $5 per share on the put option, or $25,000 total. So his net loss will be $25,000, which when added to the $170,000 value of the stock, gives a total value of $195,000.

Bill Jones Inherited 5,000 Shares of Stock Priced at $45