PS7 Answers - Problem Set #7 Answer Key 1 a. If the stock...

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Problem Set #7 Answer Key 1 a. If the stock price is $65 at expiration: The payoff to the owner of a call option at expiration is the maximum of zero and the current stock price minus the strike price. The payoff to each of Mr. Chang’s call options is: max[0, S T - K] = max[0, 65-70] = $0 where S T = the price of the underlying asset at expiration K = the strike price Since Mr. Chang bought 2 call contracts and each contract is for 100 options, the payoff to Mr. Chang’s position in call options is: # call contracts * # options per call contract * payoff per call option = 2 * 100 * $0 = $0 The payoff to the owner of a put option at expiration is the maximum of zero and the strike price minus the current stock price. The payoff to each of Mr. Chang’s put options is: m a x [ 0 , K - S T ] = max[0, 75-65] = $10 Since Mr. Chang bought 1 put contract and each contract is for 100 options, the payoff to Mr. Chang’s position in put options is: # put contracts * # options per put contract * payoff per put option = 1 * 100 * $10 = $1,000 The total payoff of Mr. Chang’s position is the sum of the payoffs of his positions in call and put options. Total Payoff if the stock price is $65 at expiration = $0 + $1000 = $1,000 If the stock price is $72 at expiration: The payoff to each call option is: max[0, S T - K] = max[0, 72-70] = $2 The payoff to each put option is: max[0, K- S T ] = max[0, 75-72] = $3 The payoff to the position in calls is: 2 * 100 * $2 = $400 The payoff to the position in puts is: 1 * 100 * $3 = $300 Total Payoff if the stock price is $72 at expiration = $400 + $300 = $700 If the stock price is $80 at expiration: The payoff to each call option is: max[0, S T - K] = max[0, 80-70] = $10 The payoff to each put option is:
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PS7 Answers - Problem Set #7 Answer Key 1 a. If the stock...

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