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CHAPTER+7+Problem+Solutions

# CHAPTER+7+Problem+Solutions - CHAPTER 7 Extra Problems...

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CHAPTER 7

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Extra Problems Problem 1: If you long a European call option on a security with a strike of \$80 and an expiry date at one year later, (a) What is the option payoff at expiry if the security price one year later is \$100? What is the payoff at expiry if the security price one year later is \$90? (b) Plot the option payoff at expiry as a function of the security price level at expiry. (c) How do your answers to (a) and (b) change if you have a short position in the call option instead? (d) If currently the security price is \$100 and its forward price is \$101, is this call option in-the-money, out-of-the-money, or at-the-money? What’s the option’s intrinsic value? (Assume that the interest rate is 5%). (e) How do your answers to (d) change if the current security price is \$60 and its forward price is \$60.5? (Assume that the interest rate is 5%). Solution: Was done in Class on Wednesday Problem 2: An investor holds 1,000 shares in ABC Corp. which has a current market price of \$58. The investor sells 1,000 call options on the shares at a premium of \$5 and
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CHAPTER+7+Problem+Solutions - CHAPTER 7 Extra Problems...

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