Options Solutions 4

# Options Solutions 4 - \$7.75 =[Exercise Price \$65.00 \$3.50...

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Old Exam Problems - Options - Solutions Page 4 of 13 Pages 5. Assume that an investor buys a put for \$3.50 and an equivalent call for \$1.25, where they both have the same exercise price and expiration date. At expiration, the investor will net a profit of \$7.75 when the stock price closes at \$65.00. Determine the possible exercise prices for the call and the put. * A. \$52.50 or \$77.50 B. \$50.30 or \$72.30 C. \$57.40 or \$67.40 D. \$47.50 or \$82.50 If the call is exercised, we would have: Profit = [Stock price - Exercise price] - Cost of Put - Cost of Call \$7.75 = [\$65.00 - Exercise Price] - \$3.50 - \$1.25 \$12.50 = \$65.00 - Exercise Price Exercise Price = \$65.00 - \$12.50 = \$52.50 If the put is exercised, we would have: Profit = [Exercise price - Stock price] - Cost of Put - Cost of Call
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Unformatted text preview: \$7.75 = [Exercise Price - \$65.00] - \$3.50 - \$1.25 \$12.50 = Exercise Price - \$65.00 Exercise Price = \$65.00 + \$12.50 = \$77.50 6. Assume that a stock is currently selling for \$50. The stock price could go up by 10% or fall by 2% each month. The monthly interest rate is 1% (periodic rate). Calculate the price of a call option on the stock with an exercise price of \$40 and a maturity of two months. (use the binomial method) A. \$12.66 * B. \$10.79 C. \$11.47 D. \$ 9.99 E. \$13.84 u = 1.10; d = .98; P = (1.01 - .98)/(1.10 - .98) = .25; (1-P) = 1 - .25 = .75 P = \$50 P 1 = (\$50)(1.10) = \$55.00 (\$50)(0.98) = \$49.00 P 2 = (\$50)(1.10)(1.10) = \$60.50 (\$50)(1.10)(0.98) = \$53.90...
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