Tutorial 6

Tutorial 6 - Question-3 A one-year European call option on...

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1 of 1 PROBLEMS for TUTORIAL VI Question-1 One-year European call options are available on Dot.com stock with an exercise price of $100. Dot.com stock is now selling at $90 per share. Assume that on exercise day Dot.com shares sell at one of two possible prices: $80 or $120. If the Treasury bill rate is 4%. a) How much would you pay for one call option on Dot.com stock? b) How many shares along with the risk free asset do you need to replicate the call option on Dot.com stock? c) How much would you pay for one put option on Dot.com stock? Question-2 Dot.com's assets are currently worth $900. In one year, they will be worth either $600 or $1200. The risk-free interest rate is 5%. Suppose Dot.com has an outstanding debt issue with a face value $500. a) What is the value of equity? b) What is the value of debt?
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Unformatted text preview: Question-3 A one-year European call option on one share of Dot.com with an exercise price of $50 is currently trading at $10, and a one-year European put option on one share of Dot.com with an exercise price of $50 is currently trading also at $10. Fill the tables below for the profit of the following portfolios as a function of the stock price at maturity. a) Buy one call and one put option (a long straddle). b) Sell one call and one put option (a short straddle). Question-4 Draw on a graph the value of the following portfolios ( Portf T ) at maturity as a function of the price of the underlying stock ( S T ). 1) Buy a call option with strike price K C and a put option with strike price K P such that K P > K C . 2) Buy a share of the stock and sell a call option with the same strike price K ....
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This note was uploaded on 12/10/2011 for the course MGCR 341 taught by Professor Trainor during the Winter '08 term at McGill.

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