Collar: Change in the profit of the collar..

CFA Level III Derivatives
#1

HMM Foundation owns 30,000 shares of NASDAQ 100 Index Tracking Stock (QQQQ), which has a current price of $30 per share. Osborne believes there is substantial risk of downside price movement in the index over the next six months. She recommends HMM use a six-month collar for the entire position of 30,000 shares as protection against the QQQQ price falling below $27. HMM would maintain the collar strategy until expiration of the put and call options. Exhibit 1 provides data on current QQQQ puts and calls expiring in six months.

Exhibit 1

QQQQ Puts and Calls Expiring in Six Months

Option Type** Exercise Price ()****Option Premium ()** Call 35 0.80 Put 27 0.95

If HMM enters into the collar recommended by Osborne, and the market value of QQQQ is $33 when the options expire, the change in the profit of the collar would be closest to:

  1. $94,500.
  2. $85,500.
  3. $90,000.

2 is correct. The profit per collar = ST + max(0, X1 − ST) − max(0, ST − X2) − S0 − (p0 − c0)

Profit = 33 + 0 − 0 − 30 − 0.15 = 2.85

Total profit = $2.85× 30,000 = $85,500

Shouldn’t we calculate the Value at expiration only…?? Didn’t get this, anyone can help…

#2

The collar has stock position, so it has value all the time, not just at expiration.

In actually, options have value all the time too… You can close out positions for a gain or loss…

#3

0 payoffs on both options. Stock goes up by 3 dollars and net that against your net premiums on both option positions.

#4

You also need to have values when putting together financial statements.

#5

Okay, Got it…

Thanks guys… :slight_smile: