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Unformatted text preview: FIN 2200 – CORPORATION FINANCE Sum 2007 Professors: A. Dua Assignment #10 key Instructions: Complete the following questions and place your answers in the space provided below. Do not round off your answers or intermediate calculations. Final dollar answers should be rounded to two decimal places. All other answers should be rounded to 8 decimal places. 1. Fill in the empty cells in the table below. Option Type E Payoffs of the option given different stock prices S T = 0 S T = 15 S T = 30 S T = 45 S T = 60 Long put $23 $23 $8 Short put $31-$31-$16-$1 Short call $28-$2-$17-$32 Short call $26.50-$3.50-$18.50-$33.50 Long call $35 10 25 Long put $27 $27 $12 Long call $12 $3 $18 $33 $48 Short put $37-$37-$22-$7 Note: E = an option’s exercise or strike price. S T = the stock’s price at the expiration of the option. “Long” is the equivalent of owning something. “Short” is equivalent to selling something not owned or to writing an option. 2. The Put-Call Parity equation determines the functional relationship among four securities: the underlying stock; a European call and a European put on this stock (both options have the same strike price and the same length of time till expiry); and a T-bill (with a current value equal to the present value of the exercise price and with the same expiry date as the options). Indicate clearly which position to take (long or short) in order to replicate a) a long synthetic call Long stock, long put, short T-bills b) a short synthetic call Short stock, short put, long T-bills FIN 2200 – CORPORATION FINANCE Term 2, 2006/2007 Professors: A. Dua, J. Falk, A. Paseka, R. Scott Assignment #10 key c) a long synthetic put Short stock, long call, long T-bills d) a short synthetic put Long stock, short call, short T-bills e) a long synthetic T-bill Long stock, long put, short call f) a short synthetic T-bill Short stock, short put, long call g) a long synthetic underlying stock Short put, long call, long T-bills h) a short synthetic underlying stock Long put, short call, short T-bills 3. Laura has just had a long conversation with her broker who has convinced her to do the following initial transactions: loan out $42.74 to be paid back in 6 months at a rate of 6% per year (effective); short sell a share of BCD stock; and buy a call option with E = $44 and expiration in 6 months on BCD stock. Laura’s brother, George, talked to his broker and has decided to buy a put option with E = $44 and expiration in 6 months on BCD stock. Complete the tables below to determine the payoffs to Laura and George in 6 months when they liquidate their positions, given different possible prices of BCD’s stock. (Assume the brokers charge no commissions.) Laura’s Initial Transactions Payoffs in 6 months given different stock prices S T = $0 S T = $20 S T = $40 S T = $60 S T = $80 Loan out $42.74 $44 $44 $44 $44 $44 Short sell BCD stock-$0-$20-$40-$60-$80 Buy call; E = $44 $0 $0 $0 $16 $36 Laura’s total payoff in 6 months $44 $24 $4 $0 $0 FIN 2200 – CORPORATION FINANCE...
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