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Homework%203-Fall07

Homework%203-Fall07 - James S Doran Assistant Professor of...

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James S. Doran Assistant Professor of Finance Florida State University 1 Senio 4934 Option Pricing a sk Management r Seminar nd Fina cial Ri n Homework #3 1. A trader buys 600 shares of a stock and sells six call options contracts on the stock. The tr ce of the option is $7. What is the trader’s minimum cash n s ike price is $40. The pri i vestment a. If the stock price is $38 b. If the stock price is $42 c. If the contracts were naked, what is the initial margin if the stock price is $38 2. You are the manager of a highly levered company. All the debt will mature in a year. If the value of the company is higher than the debt in one year, you will pay off the debt. If th v ebtholders will own h e alue is less than the debt, you will declare bankruptcy, and the d t e company a. Express your position as an option on the value of the company ons on the value of the b. Express the position of the debtholders in terms of opti company c. What can you do to increase the value of your position 3. A diagonal spread is created by buying a call with a strike price X
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