PS7 Answers

# 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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