Tuesday, 29 September 2015

Risk Management Using Option Strategy

So far, things have gone well with Dr. Washington. Before you wrap up your meetings and he begins investing, you decide to spend a little time sharing information with him about using derivatives to manage risk and enhance returns in his stock portfolio.

You decide the best way to illustrate this is via a call option that he can use on a stock that might have some upside potential. If the stock does not reach the potential, the option minimizes the risk. The stock is AXQ Enterprises—a high-tech firm that did well during the Internet boom but declined when the boom turned into a bust.

If the company’s new portal software is adopted by a large number of consumers over the next few months, you believe the stock can go much higher. The 6-month options are priced at US$1, the strike price is US$22, and the current price for AXQ stock is US$20.

Put together a PowerPoint presentation with a table or graph included that illustrates what advice you would give Dr. Washington on the options if the price of the stock was US$18, US$21, US$24, or US$28 at the end of 6 months.

Assignment Guidelines:
Create a PowerPoint presentation for Dr. Washington that includes the following:  Slide 1 - Title Slide (Name, course name, and unit number) Slide 2 - Your table or graph that contains the stock option data and the profit/loss depending on the stock prices of US$18, US$21,  US$24, or US$28 at the end of the 6-month period.  Slide 3 - Your recommendations on whether or not to  exercise the option based on the four hypothetical stock prices from slide 2.  Explain the reasoning behind your recommendations. Slide 4 - Answer the following question:  What happens if the stock price hits US$23? US$23.01? Slide 5 - Answer the following question:  What purpose could adding a technology company into a stock portfolio serve? PowerPoint presentation adheres to the general presentation format above.


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