Joe Finance has just purchased a stock index fund, currently selling at $1200 per share.

Joe Finance has just purchased a stock index fund, currently selling at $1200 per share.To protect against losses, Joe also purchased an at-the-money European put option on the fund for $60, with exercise price $1200, and three-month time to expiration. SallyCalm, Joe’s financial adviser, points out that Joe is spending a lot of money on the put.She notes that three-month puts with strike prices of $1170 cost only $45, and suggests that Joe use the cheaper put.a. Analyze Joe’s and Sally’s strategies by drawing the profit diagrams for the stock-plus-put positions for various values of the stock fund in three months.b. When does Sally’s strategy do better? When does it do worse?c. Which strategy entails greater systematic risk?

Profit/lossBreak even at 11401100 1200 1300 Share price 1220 Share price -60 PAYOFF FROM JOE’S STRATEGY Profit/lossBreak even at 11251100 1170 -45PAYOFF FROM SALLYS STRATEGY Market price($)…

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