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    Zero Cost Collars and Underlying Assets

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    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.

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    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

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