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Joseph Jones, a manager at Computer Science, Inc. (CSI), received 10,000 shares of company stock as part of his compensation package. The stock currently sells at $40 a share. Joseph would like to defer selling the stock until the next tax year. In January, however, he will need to sell all his holdings to provide for a down payment on his new house. Joseph is worried about the price risk involved in keeping his shares. At current prices, he would receive $400,000 for the stock. If the value of his stock holdings falls below $350,000, his ability to come up with the necessary down payment would be jeopardized. On the other hand, if the stock value rises to $450,000, he would be able to maintain a small cash reserve even after making the down pay- ment. Joseph considers three investment strategies: Q. Strategy A is to prepare January call options on the CSI shares with strike price $45. These calls are currently seIling for $3 each. h. Strategy B is to buy January put options on CSI with strike price $35. These options also sell for $3 each. c. Strategy C is to establish a zero-cost collar by writing the January calls and buying the January puts. Evaluate each of these strategies with respect to Joseph's investment goals. What are the advan- tages and disadvantages of each? Which would you recommend?

Microeconomics, Economics

  • Category:- Microeconomics
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