6.) Which of the following swaps will least likely capture the greatest economic benefit,
based on the committee's 24-month market view?
A. Swap 1
B. Swap 3
C. Swap 2
Silva
Manuel Silva is a principal at Raintree Partners, a financial advisory firm, and a specialist in
providing advice on risk management and trading strategies using derivatives. Raintree’s clients
include high-net-worth individuals, corporations, banks, hedge funds, and other financial market
participants.
One of Silva’s clients, Iria Sampras, is meeting with Silva to discuss the use of options in her
portfolio. Silva has collected information on S&P 500 Index options, which is shown in Exhibit 1.
Exhibit 1: Options Data for S&P 500 Stock Index
(options expire in six months; multiplier = $100)
Exercise Call Put
Price Price Price
$1,100 $95.85 $42.60
$1,125 $80.50 $48.00
$1,150 $64.70 $60.00
At the beginning of the meeting, Sampras states: “My investment in Eagle Corporation stock has
increased considerably in value, and I would like suggestions on options strategies I can use to
protect my gains.” Silva responds:
There are two strategies that you may want to consider: covered calls or protective
puts. Covered calls provide a way to protect your gains in Eagle Corporation stock.
Adding a short call to your long position in Eagle stock will provide protection against
losses on the stock position, but it will also limit upside gains. A protective put also
provides downside protection, but it retains upside potential. Unlike covered calls,
protective puts require an upfront premium payment.
At the end of the meeting, Sampras asks Silva to provide a written analysis of the following
option strategies:
Strategy A: A butterfly spread strategy using the options information provided in Exhibit
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