A collar is established by buying a share of stock for $50, buying a 6-month put option with exercise price $43, and writing a 6-month call option with exercise price $57. On the basis of the volatility of the stock, you calculate that for a strike price of $43 and expiration of 6 months, N (d1) = 0.8235, whereas for the exercise price of $57, N (d1) = 0.7411. a. What will be the gain or loss on the collar if the stock price increases by $1?

Question

Business

Alissa

28 July, 14:33

A collar is established by buying a share of stock for $50, buying a 6-month put option with exercise price $43, and writing a 6-month call option with exercise price $57. On the basis of the volatility of the stock, you calculate that for a strike price of $43 and expiration of 6 months, N (d1) = 0.8235, whereas for the exercise price of $57, N (d1) = 0.7411. a. What will be the gain or loss on the collar if the stock price increases by $1?

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Answers (1)

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Quincy · Answer 1

The gain on collar is $0.0824

Explanation:

Given Data;

6-month put option exercise price = $43

writing a 6-month call option exercise price = $57

Value of share of stock = $50

N (d1) = strike price of $43 and expiration of 6 months = 0.8235

N (d1) = the exercise price of $57 = 0.7411

Position Delta

Buy stock, $50 1

Buy put, $43 N (d1) - 1

= 0.8235-1

= - 0.1765

Write call, $57 - N (d1)

= - 0.7411

Total $0.0824

Therefore, when the price increased by $1, the gain on collar is $0.0824