Problemset1 - PROBLEM SET1 DUE ON February 5 2008(Tuesday 1...

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PROBLEM SET1 DUE ON February 5, 2008 (Tuesday) 1) Explain and show on a diagram the profit at maturity from the following combinations of positions. Please show the profit from each option or stock and the profit from the combined position on ONE graph. You should have one graph each for a, b, c, and d. Please label carefully all turning points and profit levels. To find the future value, use continuous compounding, where r is 0.01 and t is 0.0417. You can use ranges of $65, 66, 67, 68, 69. .......... $82 for DELL stock price at maturity. Option on DELL Strike Expiration Call Put 71.76 70 Sep 2.25 0.45 71.76 75 Sep 0.10 3.40 71.76 80 Sep 0.05 8.30 a) Buy one 70 Sep call and buy one 80 Sep Put b) Buy one 70 Sep put, buy one 80 Sep put c) Buy one 70 Sep put, buy one 80 Sep put, and buy a round lot (100 shares) of the underlying stock d) Compare the profits from these positions. Is there any apparent arbitrage? If you succeed in finding a sure way to make money, your profit should be entirely
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