Jiayu LUO z3219847

PAYOFF AND P/L TABLES AND DIAGRAMS DUE IN WEEK 11

1. The followi ! "#e$%io $ &efe& %o B'$$' e$e( AFR( )# e *+( *,,-( .ow %o $%o/ lo$$e$0 Whe i 1o#2%( !e% o#% i3 De$4&i2e 2&iefl5 how ' $%o/6lo$$ wo&7$. A stop-loss is a rule that states that a stock should be sold automatically after it reaches a predetermined tri er price! "asically you tell your broker to e#ecute a trade only $hen a specified price le%el is reached durin tradin ! &n this $ay' you are able to cut your losses in the lon term' by co%erin their a%era e losses o%er the lon run $ith a%era e ains ( since stop-loss allo$s for in%estors to limit their do$nside e#posure but allo$ them to hold onto profits! )ou first need to choose a stop-loss price- a basic rule is to decide ho$ much you are prepared to lose on a i%en in%estment' and set your stop accordin ly! )ou can then lea%e these stop-loss tri er points $ith your broker or use an online-ser%ice $hich allo$s you automatically to set a price at $hich you $ill sell! ii3 E8/l'i %he 1,9 $%o/6lo$$ &#le of %h#:2 ' 1 /&o;i1e ' e8':/le of how $#4h ' :e4h' i$: 4o#l1 2e #$e1. &n decidin the price le%el' a common method of doin so is to decide ho$ much capital you are $illin to lose! *he 1+, stop-loss rule of thumb basically sets the price le%el such that you are to sell if the price falls by 1+,! -o for e#ample' if ./++ is ho$ much you are prepared to lose on a i%en in%estment' then the 1+, rule says that the total in%estment in the stock should be no more than ./+++! 0+!1 # /+++ 1 /++2! *herefore you $ould sell the stock if the total capitalisation fell to .4/++! iii3 Wh'% '&e %he $i:il'&i%ie$ ' 1 1iffe&e 4e$ 2e%wee ' $%o/6lo$$ $%&'%e!5 ' 1 ' /&o%e4%i;e /#% $%&'%e!5< A stop-loss strate y and a protecti%e put strate y are similar in that they both insure a ainst fallin stock prices by settin a cap' so that the loss is limited! *here is also no limit to the potential increases in profit from increases in the share price under both strate ies! 3o$e%er' $hile the ma#imum loss for a protecti%e put is the cost of the insurance 0the premium2' the loss for a stop-loss strate y is dependant on the in%estor4s indi%idual tri er price' $hich may be $hen the stock falls by 1+, or 2/,! *he e#piration date on the lon put limits the time a%ailable to e#ercise the protecti%e put! 5n the other hand' the stop-loss strate y does not ha%e a time limit to $hen you have to sell your stock!

Se$$io 1= A.

Jiayu LUO z3219847

B. >. D.