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Zero Cost Collars and Underlying Assets

Using the option prices given below, give an example of a zero cost collar and explain how it could be used to hedge a long position in the underlying asset. You may assume the underlying asset is an equity currently at $100.

Maturity Strike Calls Puts
======================================
3 Month 90 12.0 1.0
95 8.5 3.0
100 5.5 4.5
105 3.0 7.0
110 2.0 10.0

Please kindly include any assumptions, formulas, detailed steps while providing the solution.

Solution Preview

Maturity Strike Calls Puts
======================================
3 Month 90 12.0 1.0
95 8.5 3.0
100 5.5 4.5
105 3.0 7.0
110 2.0 10.0

Let's begin with the definition. What is a zero cost collar?

A collar is created by an investor when he
-Long the ...

Solution Summary

A zero cost collars and underlying assets are provided in the solution.

$2.19