Chapter013

# Chapter013 - The Theory of Interest Solutions Manual...

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The Theory of Interest - Solutions Manual Chapter 13 1. Stock Option ( a ) 84 80 0 2 5% 100% 80 2 - - = + = - ( b ) 80 80 0 2 0% 100% 80 2 - - = = - ( c ) 78 80 2 2 2.5% 0% 80 2 - - = - = ( d ) 76 80 4 2 5% 100% 80 2 - - = - = + ( e ) \$78, from part ( c ) above ( f ) 2 0 \$2 TVP P IVP = - = - = 2. ( a ) 100 98 \$2 IVC S E = - = - = ( b ) 6 2 \$4 TVC C IVC = - = - = ( c ) \$0 since IVP S E = ( d ) 2 0 \$2 TVP P IVP = - = - = 3. Profit position = − Cost of \$40 call + Cost of \$45 call + Value of \$40 call − Value of \$45 call ( a ) 3 1 0 0 \$2 - + + - = - ( b ) 3 1 0 0 \$2 - + + - = - ( c ) 3 1 2.50 0 \$.50 - + + - = ( d ) 3 1 5 0 \$3 - + + - = ( e ) 3 1 10 5 \$3 - + + - = 4. See answers to the Exercises on p. 623. 5. ( a ) Break-even stock prices = E C P + + and . E C P - - ( b ) Largest amount of loss = C P + 154

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The Theory of Interest - Solutions Manual Chapter 13 6. ( a ) The shorter-term option should sell for a lower price than the longer-term option. Thus, sell one \$5 option and buy one \$4 option. Adjust position in 6 months. ( b ) If 50 S in 6 months, profit is: \$1 if 48 S = in one year. \$1 if 50 S = in one year. \$3 if 52 S = in one year. If 50 S is 6 months, profit is: \$3 if 48 S = in one year. \$1 if 50 S = in one year. \$1 if 52 S = in one year. 7. See answers to the Exercises on p. 623. 8. P increases as S decreases, the opposite of calls. P increases as E increases, the opposite of calls. P increases at t increases, since longer-term options are more valuable than shorter- term options.
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## This document was uploaded on 12/10/2011.

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Chapter013 - The Theory of Interest Solutions Manual...

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