Tutorial+11_Derivatives+with+solution

Tutorial+11_Derivatives+with+solution - Tutorial 11 Option...

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Unformatted text preview: Tutorial 11: Option Markets, Option Algebra and Synthetic Option Strategies Due Date : 10 August 2009 1. 1 Define the following terms associated with options: a. Option b. Exercise c. Strike price d. Expiration date e. Call option f. Put option 2. 2 Complete the following sentence for each of these investors: a. A buyer of a call options b. A buyer of a put options c. A seller (writer) of a call options d. A seller (writer) of a put options “The (buyer/seller) of a (put/call) option (pays/receives) money for the (right /obligation) to (buy/sell) a specified asset at a fixed price within a fixed period of time.” 3. Graphically demonstrate the profit/loss profiles of the long and short positions for the following two options : Option Underlying Spot Strike Expiration Type Premium (Contract) Call SASOL 400 450 30 Oct American R5000 Put SAB 28 30 31 Dec European R400 Note: Standard option contract size is on 100 shares In your answer: * Define the long and short positions for each option. * Indicate whether the options are in-the-money, at-the-money or out-of- the-money * Compute the current intrinsic value and time value for each option. * Compute payoffs and profit/loss for both long and short positions in the SASOL call option if SASOL share prices are R340, R420 and R580 at expiration. 1 Q1 from RWJaffe, 4th ed, Q 21.1 2 Q2 from RWJordan, 3rd ed, Ch31 1 * Compute payoffs and profit/loss for both long and short positions in the SAB put option if SAB share prices are R20, R24, R31 and R40 at expiration. * Label all relevant point in your graphs. 4 3 . Mrs Gerard sold 10 IBM put contracts and bought 5 IBM call contracts with the proceeds of the sales. Both options have the same exercise price of $80 and the same expiration date. Draw the payoff diagram of her zero- investment portfolio. (Hint: Draw up a table first, to determine the payoff if S T < $80; S T = $80; S T > $80) 5. Draw a profit-loss graph for the following option strategies. a. Buy a put, $2 premium, $70 exercise price. b. Write a call, $3 premium, $40 exercise price. c. Buy stock for $80 and buy put on the same stock, $1 premium, $70 exercise price....
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This note was uploaded on 06/01/2011 for the course FIN 3026W taught by Professor Drtoerien during the Summer '09 term at University of Cape Town.

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Tutorial+11_Derivatives+with+solution - Tutorial 11 Option...

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