Treasury and risk management

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60 165 28 -$28.00 Do Not Exercise $32.00 Long Share Profit or Loss = Current Stock Price – Spot Share Price For instance, when current stock price is $121 and the Purchase price is $171, the Long Share Profit or Loss = $(121-171) = -$50. Option Value = Strike Price – Current Stock Price For Instance, when the strike price is $165 and the current stock price is $121, the Option Value = $(165-121) = $44 (In-the-Money) Long Put Profit Loss = Max [(Option Value – Premium paid), Premium paid] For Instance, when the premium paid is $28, Long Put Profit Loss = Max [(44-28), -28] = $16 The option will be exercised only when there is a Long Put Profit otherwise the option will not be exercised and the loss will be limited to the initial premium paid. Hence, this strategy is also known as the ‘Protective put’ strategy. For instance, when current stock price is $121 and premium paid is $28, the option should be exercised. Similarly, for different current stock prices, the protective put strategy can be computed. … e), Premium paid] = Max [(165-121), -28] = $34 So, from the above it can be said that if the put is at $121, only loss of $34 and if put is not exercised, loss will be $50. Hence, the breakeven share price is $199. It implies that the hedger will start to make profit after crossing the breakeven point of $199 when all premiums are paid and initial purchasing cost of shares are taken into consideration. Section (c) The protective put strategy diagram along with the breakeven point is shown below, Answer 2. Section (a) Introduction Many analysts believe that the European economy is likely to face more turmoil before it finally gets better. Greece owes a total debt of €490 billion to various banks in Euro zone. Analysts believe that if Greece fails to repay its debt then the impact of default will be directly felt by the small as well as the large businesses in UK. With such a huge amount of debt, if Greece really fails to repay and leave Euro, then the consequence of that will be mostly felt by the various banks in UK and Euro to whom Greece owes. Argument Defaulting of Greece or separating Greece from the Euro zone may not be suitable options to revive the European economy since the implication of both outcomes will paralyze the European economy as well as the global markets. This is mainly because of the fact that the banks do not work in isolation. They are connected to each other through debt guarantees or collaterals and insurance products (Mylonas, 2011, pp.81-84). Assuming that the Greece will default and then the most probable impact will be that about eighty percent of British banks will have less money to lend out to individuals and businesses. Consequently, if the bank’s lending slows down then the consumer consumption will decline leading to deflation in