c

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)