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S07Assg10

# S07Assg10 - FIN 2200 CORPORATION FINANCE Sum 2007...

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FIN 2200 – CORPORATION FINANCE Sum 2007 Professors: A. Dua Assignment #10 Not to be handed In 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 -\$31 -\$16 -\$1 0 0 Short call \$28 0 0 -\$3.50 -\$18.50 -\$33.50 Long call \$35 \$27 \$12 0 0 0 0 \$3 \$18 \$33 \$48 Short put \$37 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 b) a short synthetic call c) a long synthetic put d) a short synthetic put e) a long synthetic T-bill f) a short synthetic T-bill g) a long synthetic underlying stock h) a short synthetic underlying stock

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FIN 2200 – CORPORATION FINANCE Term 2, 2006/2007 Professors: Professors: A. Dua, J. Falk, A. Paseka, R. Scott Assignment #10
FIN 2200 – CORPORATION FINANCE Term 2, 2006/2007 Professors: Professors: A. Dua, J. Falk, A. Paseka, R. Scott Assignment #10 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 Short sell BCD stock Buy call; E = \$44 Laura’s total payoff in 6 months George’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 Buy put; E = \$44 4. 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 sell a put option with E = \$44 and expiration in 6 months on BCD stock. Laura’s brother, George, talked to his broker and has decided to sell a call option with E = \$44 and expiration in 6 months on BCD stock.

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