Question

You have the following information about forward and options contracts on the same stock. All derivatives have one-year maturity. Risk-free rate is 10%. S₀ = $45.25, F_0,1 = $50, C_K=45 = $7.70, C_K=45 = $5.40, P_K=45 = $3.20, and P_K=50 = $5.40.

What is the profit if you hedge a short position of the stock with a forward contract if the stock price at maturity is $47?

Group of answer choices

Answer 1

Given that, A short position is stock is taken,

So stock is now sold at S0 = $45.25 and and the position will be offset at future time by buying the stock.

So, a long forward position is taken at a strike price of $50 so that, it price rise above, stock will be bought at price of $50

So, at expiration, of price St = $47

So, total profit = Profit from short position + Profit from forward

Profit form short position = (S0 - St) = (45.25 - 47) = -$1.75

Profit from long forward = St - K = 47 - 50 = -$3

So, total profit = -3 - 1.75 = -$4.75