Assignment #5:
Derivative Security Analysis Exercise
1.
The common stock of the Island Angler Corporation is currently trading at a price of $31
per share.
Both a put and a call option are available for the stock, each having an
exercise price of $30 and an expiration date in exactly six months.
The current market
prices for the put and call are $1.50 and $3.09, respectively.
The riskfree holding period
return for the next six months is 2 percent, which corresponds to a 4 percent annual rate.
a.
For each possible stock price in the following sequence, calculate the expiration date
payoffs (net of the initial purchase price) for the following positions: (1) buy one
Island Angler call option, and (2) short on Island Angler call option:
10, 15, 20, 25, 30, 35, 40, 45, 50
Draw a graph of these payoff relationships, using net profit on the vertical axis
and potential expiration date stock price on the horizontal axis.
Be sure to specfy
the prices at which these respective positions will break even (i.e., produce a net
profit of zero).
b.
Using the same potential stock prices as in Part a, calculate the expiration date
payoffs and profits (net of the initial purchase price) for the following positions: (1)
buy one Island Angler put option, and (2) short one Island Angler put option.
Draw a
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 Spring '11
 Expiration date, Island Angler

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