value: 1.25 points You did not receive full credit for this question in a previo

Question

value: 1.25 points You did not receive full credit for this question in a previous attempt A collar is established by buying a share of stock for $45, buying a six-month put option with exercise price $40, and writing a six- month call option with exercise price $50. Based on the volatility of the stock, you calculate that for an exercise price of $40 and maturity of six months, d) = 07182, whereas for the exercise price of S50, Md) = 06384. What will be the gain or loss on the collar if the stock price increases by $1? (Input the amount as a positive value. Round your answer to 3 decimal places.) Gain of $ 0.798

Explanation / Answer

when the stock price increases by $1

Total gain/loss = gain/loss in stock + gain/loss in call option+ gain/loss in put option

Stock is long, therefore gain in stock is $1

Since Put option is also long, increase in stock price will lead to gain

Gain in put option = $1 * 07812 = $0.7812

Since Call is short, therefore increasing price will lead to gain

Gain in call option = $1 * 0.6384 = $0.6384

Total gain = 1 + 0.7812 + 0.6384 = $ 2.4196 = $ 2.420

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