Suppose Your Wealthy Aunt Minnie Has Asked You to Manage

question 57

Essay

Suppose your wealthy Aunt Minnie has asked you to manage her large stock portfolio.You would like to buy and/or sell options on many of the stocks she owns.Describe the types of options you would buy or sell, as well as your rationale, given the following circumstances:
a.Aunt Minnie owns 10,000 shares of IBM common stock.You believe it is going to fall in price, but she won't let you sell it because her late husband told her never to let it go.How do you protect her from the impending price decline?
b.Your analysis suggests that the common stock of Jet-Electro is poised to increase in value sharply over the next year.Aunt Minnie doesn't want to buy any of the stock, but does want you to use options to profit if the price rises.What do you do?
c.Although Aunt Minnie doesn't want you to sell any of the stocks she owns, she would like you to use options to generate a little extra income.How might you do this?

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Definitions:

Significance Level

A threshold in hypothesis testing that determines the probability of rejecting the null hypothesis when it is actually true, usually denoted by alpha (α).

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P-value

The chance of getting test outcomes that are as drastic as or more than the observed results, given that the null hypothesis holds.