WHICH OF WATANBE’S THREE STATEMENTS TO KONDO IS LEAST LIKELY CORRE...

42. Which of Watanbe’s three statements to Kondo is least likely correct?

A. Statement 1

B. Statement 2

C. Statement 3

Manuel Silva Case Scenario

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 wish 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 1.

Strategy B: A straddle strategy using options in Exhibit 1 with an exercise price of $1,125.

Strategy C: A collar strategy using options information in Exhibit 1.

On 16 March 2010, First Citizen Bank (FCB) approached Silva for advice on a loan commitment. At that

time, FCB had committed to lend $100 million in 30 days (on 15 April 2010), with interest and principal

due on 12 October 2010, or 180 days from the date of the loan. The interest rate on the loan was 180-

day LIBOR + 50 bps, and FCB was concerned about interest rates declining between March and April.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to

Silva advised FCB to purchase a $100 million interest rate put on 180-day LIBOR with an exercise rate of