FINE 342 Lecture Notes - Lecture 7: Portfolio Insurance, Corporate Finance, Straddle

• School: McGill University
• Department: Finance
• Course: FINE 342
• Professor: Vadimdi Pietro

Document Summary

Speculation (betting): not necessarily a bad thing. If microsoft tanks to , then you have: difference between ,600 and ,500 is deductible. Combining stock with put options creates protective put: portfolio insurance (hedging): e. g. , protective put. You have 100 shares of msft stock at , for a total investment of ,600. Buy a msft put option with =(cid:886)(cid:887) on 100 shares: (cid:887) (cid:883)(cid:882)(cid:882)+(cid:882) (cid:883)(cid:882)(cid:882)=,(cid:887)(cid:882)(cid:882) (less the cost of put), without insurance would have (cid:887) (cid:883)(cid:882)(cid:882)=,(cid:887)(cid:882)(cid:882). The put costs far less than ,000 loss you would have. Can create protective put through stock and long put. Protective put: long position in put held on stock you already own. Portfolio insurance: protective put written on portfolio rather than single stock. Example: payoff of protective put portfolio at expiration (cid:1793)(cid:1820)(cid:1815)(cid:1811) (cid:1821)(cid:1820) (cid:1794)(cid:1815)(cid:1820)(cid:1812) (cid:2175)(cid:2176)< (cid:2175)(cid:2176)> (cid:1845)(cid:3021) (cid:1845)(cid:3021) (cid:882) (cid:1837) (cid:1845)(cid:3021) (cid:1837) (cid:1845)(cid:3021) Payoff of protective put portfolio has limited downside and unlimited upside potential.