Purchase Solution

Call Option - Using derivatives to manage risk and enhance returns in a stock portfolio

Not what you're looking for?

Ask Custom Question

So far, things have gone well with Dr. Washington. Before you wrap up your meetings with Dr. Washington and he begins investing, you decide to spend a little time sharing information with him about using derivatives to manage risk and enhance returns in his stock portfolio.

You decide the best way to illustrate this is via a call option that Dr. Washington can use on a stock that might have some upside potential. If the stock does not reach the potential, the option minimizes the risk. The stock is LVO Enterprise, a high tech firm that did well during the Internet boom but declined when the boom turned into a bust. If the company's new portal software is adopted by a large number of consumers over the next few months, you believe the stock can go much higher. The 6-month options are priced at US$1, the strike price is 22, and the current price for LVO stock is 20.

Put a slide presentation together with graphs inserted that illustrate what advice you would give Dr. Washington on the options if the price of the stock was either 18, 21, 24, or 28 at the end of six months. Be sure the graphs tell him at what price he should exercise the call option.

Purchase this Solution
Solution Summary

The solution through a power point presentation demonstrates the use of call option.

Purchase this Solution
Free BrainMass Quizzes
Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Introduction to Finance

This quiz test introductory finance topics.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

View More Free Quizzes
Related BrainMass Solutions

  • Call option

    140698 Use of call option Before you wrap up the campaign, you decide to spend a little time sharing information with investors on using derivatives to manage risk and enhance stock portfolio returns.

  • create a hedging strategy

    278518 Hedging Strategy Assume that you manage a $100 million stock portfolio of which 3% is comprised of GM stock and 3.5% is comprised of Ford stock. Assume that GM and Ford are the only automobile industry holdings in the portfolio.

  • Derivatives- option pricing

    179623 Derivatives- option pricing Need answers with calculations in Excel spreadsheet. 1. A stock currently sells for $50 and pays no dividends. There is a call option (striking price = $55) on this security that expires in 61 days.

  • Diversification of an International Portfolio

    Explain how derivative securities may further enhance a portfolio's performance Every portfolio has a level of risk and this risk change. Including derivatives allows the portfolio to dampen these changes in risks.

  • 19 Questions on Derivatives

    Answers to 19 Questions on Derivatives dealing with beta of a hedge fund, put option, CAPM, Capital Asset Pricing Model, investors, risk averse, portfolios, mean, variance, highest return portfolio, efficient frontier, abnormal returns, equity mutual

  • Investment Enhance: international diversification, alternatives, use of derivatives

    This call is a great buy for the investor since he/she will be able to purchase expensive stock at a much cheaper price.

  • Types of alternative investment vehicles and derivatives

    The idea behind using derivatives is by reducing risk, derivatives can be used to manage a portfolio related to market fluctuations. For example, futures and options are two commonly traded types of derivatives.

  • Investment Enhancement and Investments/Portfolio Management

    Let us try to understand the use of derivatives using a scenario.

  • international portfolio diversification

    Hence, effective use of derivatives such as futures, puts and options allow an investor to mitigate the downside risk in his portfolio by spending a small portion of the portfolio on acquiring derivative securities.

View More Related Solutions