BKM_Sol_Ch_15 - Chapter 15 Options Markets Chapter 15 Options Markets 1 c is false This is the description of the payoff to a put not a call 2 c is

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Unformatted text preview: Chapter 15 - Options Markets Chapter 15 Options Markets 1. c is false. This is the description of the payoff to a put, not a call. 2. c is the only correct statement. 3. Each contract is for 100 shares: $7.25 × 100 = $725 4. Cost Payoff Profit Call option, X = 85 9.40 5.00 -4.40 Put option, X = 85 1.55 0.00 -1.55 Call option, X = 90 5.50 0.00 -5.50 Put option, X = 90 3.20 0.00 -3.20 Call option, X = 95 3.00 0.00 -3.00 Put option, X = 95 5.20 5.00 -0.20 5. In terms of dollar returns: Price of Stock Six Months From Now Stock price: $80 $100 $110 $120 All stocks (100 shares) 8,000 10,000 11,000 12,000 All options (1,000 shares) 10,000 20,000 Bills + 100 options 9,360 9,360 10,360 11,360 In terms of rate of return, based on a $10,000 investment: Price of Stock Six Months From Now Stock price: $80 $100 $110 $120 All stocks (100 shares)-20% 0% 10% 20% All options (1,000 shares)-100%-100% 0% 100% Bills + 100 options-6.4%-6.4% 3.6% 13.6% 15-1 Chapter 15 - Options Markets All options All stocks Bills plus options S T 100 –100 – 6.4 Rate of return (%) 100 110 6. a. Purchase a straddle, i.e., both a put and a call on the stock. The total cost of the straddle would be: $10 + $7 = $17 b. Since the straddle costs $17, this is the amount by which the stock would have to move in either direction for the profit on either the call or the put to cover the investment cost (not including time value of money considerations). 7. a. Sell a straddle, i.e., sell a call and a put to realize premium income of: $4 + $7 = $11 b. If the stock ends up at $50, both of the options will be worthless and your profit will be $11. This is your maximum possible profit since, at any other stock price, you will have to pay off on either the call or the put. The stock price can move by $11 (your initial revenue from writing the two at-the-money options) in either direction before your profits become negative. c. Buy the call, sell (write) the put, lend the present value of $50. The payoff is as follows: Final Payoff Position Initial Outlay S T < X S T > X Long call C = 7 S T – 50 Short put-P = -4-(50 – S T ) Lending 50/(1 + r) (1/4) 50 50 Total 7 – 4 + [50/(1 + r) (1/4) ] S T S T The initial outlay equals: (the present value of $50) + $3 In either scenario, you end up with the same payoff as you would if you bought the stock itself. 15-2 Chapter 15 - Options Markets 8. a. By writing covered call options, Jones receives premium income of $30,000. If, in January, the price of the stock is less than or equal to $45, he will keep the stock plus the premium income. Since the stock will be called away from him if its price exceeds $45 per share, the most he can have is: $450,000 + $30,000 = $480,000 (We are ignoring interest earned on the premium income from writing the option over this short time period.) The payoff structure is: Stock price Portfolio value Less than $45 (10,000 times stock price) + $30,000 Greater than $45 $450,000 + $30,000 = $480,000 This strategy offers some premium income but leaves the investor with...
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This note was uploaded on 08/25/2009 for the course FNCE 4330 taught by Professor Jianyang during the Fall '09 term at University of Colorado Denver.

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BKM_Sol_Ch_15 - Chapter 15 Options Markets Chapter 15 Options Markets 1 c is false This is the description of the payoff to a put not a call 2 c is

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