Options Solutions 4

Options Solutions 4 - $7.75 = [Exercise Price - $65.00] -...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

Ask a homework question - tutors are online