428_PS6_sol_S09

428_PS6_sol_S09 - AEM 428 2009 Optional Problem set 6 1...

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AEM 428, 2009 Optional Problem set 6 1) Each option contract is for 100 shares. Calculate your total profit or loss (at the time when the options expire or when the option positions are closed out) for each of the following scenarios. 1a At time 0, the price of IBM is S 0 = \$85.10. You sell 2 call option contracts with strike price X = \$85.00 for the price of \$3.70 (per share). When the options expire 2 months later, the spot price of IBM is \$75.00. 1b Same as (1a), except that the spot price 2 months later is \$105. 1c. Same as (1a), except that you close out your options 1 month later when the call price is \$4.00. 1d At time 0, the price of MSFT is S 0 = \$56.00. You buy 5 put contracts with strike price X = \$45.00 for the price of \$1.05. When the options expire 3 months later, the spot price of MSFT is \$60.04. 1e. Same as (1d), except that the spot price of MSFT at the time the put options expire is \$42.20. Answer: 1a. By selling 2 contracts of call, seller’s payoff = (3.70)(2)(100)=740. Since S T =75 the buyer will not exercise. So the seller keeps the profit. Net payoff = 2 (370) = 740. 1b.

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This note was uploaded on 09/23/2009 for the course AEM 4280 taught by Professor Ng,d. during the Spring '08 term at Cornell.

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428_PS6_sol_S09 - AEM 428 2009 Optional Problem set 6 1...

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