Explanation:
Principal Protected Notes act by reducing losses while still providing room for potential gains.
To hedge against losses, the trader should buy a zero-coupon bond that will yield, at maturity, the $20,000 needed to exercise the option.
Therefore, the price of the bond should be equal to the present value of the strike price.
To make the portfolio profitable, the premium paid to secure the call option should cost less than:
\`$20`,000 - \`$14`,259.72 = \`$5`,740.28
Q.4623 A portfolio X consists of a five-year zero-coupon bond and a five-year call option on portfolio Y. The current price of portfolio Y is $20,000, and the strike price of the option is also $20,000. The interest rate is 7% per annum. To ensure no losses to a trader while still providing the trader with room for profits, the premium paid to secure the call option should cost less than:
A
20000
B
5740.28
C
15740.28
D
14259.72
No comments yet.