GMS Hedging Simulation

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GMS Hedging Simulation

• Joe Braveheart and Kate Torelli, security
  analysts for Lion-Fund, have both identified a
  gold mining stock (ticker symbol GMS) as a
  particularly attractive, albeit risky,
  investment. Currently GMS stock sells for 100
• Joe Braveheart would like to invest in GMS Stock
  alone.
• Kate Torelli is considering using put options to
  hedge against downside risk. She called an
  options trader at a large investment bank for
  quotes. The prices for three (European-style) put
  options are
• Put Option A
  Put Option B Put
  Option C
• Strike Price 95
  100
  105
• Option Price 2.20
  6.40
  12.50
• Kate consider a portfolio with the following
  weights
• 88 GMS, 2 Option A, 1 Option B, 9 Option C
• Based on the analysis of historical returns, Joe
  and Kate assume that GMS Stock return is normally
  distributed, with mean 2 and standard deviation
  18.33.
• Evaluate Joe and Kates portfolios.