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hw1 - Introduction to derivatives Fall 2011 BUSI 588...

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Introduction to derivatives, Fall 2011 BUSI 588, Homework 1 Homework 1 Due at the beginning of class on September 7th, 2011. 1. (*) You stare at your computer screen and see that MSFT’s stock is trading at S 0 = $24 . 68 (ask price) and S 0 = $24 . 65 (bid price). You also have the following information on stock option prices with MSFT as the underlying asset maturing in January. Calls Puts Strike Bid Ask Bid Ask 22.50 2.55 2.60 0.15 0.20 25.00 0.75 0.80 0.85 0.90 27.50 0.10 0.15 2.80 2.90 Consider the following trading strategies: (a) Buy a call option with a strike of K = $25 and short a put with a strike of K = $25. (b) Buy a call option with a strike of K = $25 and write a call with a strike of K = $27 . 5. (c) Buy a put option with a strike of K = $25 and write a put with a strike of K = $22 . 5. Let S T denote the value of the underlying asset at maturity. (i) For what values of the underlying asset S T does each trading strategy yield positive profits? Give the range for each of the trading strategies, and note that the question is about profits, not payoffs (i.e. factor in the cost of the trading strategy). (ii) Which of the strategies can be considered bearish? Which can be considered bullish? Plot the profits of each of the strategies as a function of S T .
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