# ch15 - CHAPTER 15: OPTIONS MARKETS 1. c is false. This is...

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CHAPTER 15: OPTIONS MARKETS 1. c is false. This is the description of the payoff to a put, not a call. 2. c is the only correct statement. 3. Each contract is for 100 shares: \$7.25 × 100 = \$725 4. Cost Payoff Profit Call option, X = 85 9.40 5.00 -4.40 Put option, X = 85 1.55 0.00 -1.55 Call option, X = 90 5.50 0.00 -5.50 Put option, X = 90 3.20 0.00 -3.20 Call option, X = 95 3.00 0.00 -3.00 Put option, X = 95 5.20 5.00 -0.20 5. In terms of dollar returns: Price of Stock Six Months From Now Stock price: 80 100 110 120 All stocks (100 shares) 8,000 10,000 11,000 12,000 All options (1,000) shares 0 0 10,000 20,000 Bills + 100 options 9,360 9,360 10,360 11,360 In terms of rate of return, based on a \$10,000 investment: Price of Stock Six Months From Now Stock price: 80 100 110 120 All stocks (100 shares) -20% 0% 10% 20% All options (1,000) shares -100% -100% 0% 100% Bills + 100 options -6.4% -6.4% 3.6% 13.6% All options All stocks Bills plus options S T 100 –100 0 – 6.4 Rate of return (%) 100 110

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6. a. Purchase a straddle, i.e., both a put and a call on the stock.
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## This note was uploaded on 04/09/2012 for the course FIN 431 taught by Professor Sun during the Spring '12 term at Old Dominion.

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ch15 - CHAPTER 15: OPTIONS MARKETS 1. c is false. This is...

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