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c

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• c.Consider two different portfolios:

  • Portfolio A contains XYZ stock trading currently at £50.

  • Portfolio B contains XYZ stock and a European put option written on one XYZ stock. The put option currently costs £3, has a strike price of £50 and an expiration date in 3 months.

• Compute the returns on Portfolio A and Portfolio B in three months’ time if:

  • XYZ price decreases to £30

  • XYZ price increases to £70

• Examine these returns and reflect on the role that the put option plays in Portfolio B.
  (7 marks)