Collar: Max Profit
In CAFI Derivatives vignettes Q8.
Isn’t max profit =Maximum profit = X2 – S0
This is stated on p.305 in CAFI
why do we use this equation instead Max profit per collar = ST + max(0, X1 − ST) − max(0, ST − X2) − S0 − (p0 − c0), i.e why did we deduct the − (p0 − c0)?
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 $27. HMM would maintain the collar strategy until expiration of the put and call options. Exhibit 1 provides data on current QQQQ puts and calls expiring in six months.
QQQQ PUTS AND CALLS EXPIRING IN SIX MONTHS
Exercise Price ($)
Option Premium ($)
Q. If HMM enters into the collar recommended by Osborne, the maximum profit of the collar at option expiration would be closest to:
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