PS9_Options - Problem 1 The Wall Street Journal reported...

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Problem 1 The Wall Street Journal reported the following prices for 3Com options for trading on Friday, February 7 1997. The stock itself closed at $50.75. Calls (Prices in $) Strike February March April July 45 6.625 7.5 8 10.5 50 2.8125 4.75 5.875 55 1.0625 2.625 3.75 6 60 .4375 1.3125 1.875 4.25 65 .1875 .625 1.25 70 .0625 Puts (Prices in $) Strike February March April July 45 1 1.8125 2.625 4.25 50 2.75 4 5 55 5.375 7.625 8.125 8.75 60 9.75 10.875 12.5 65 15.5 16.5 16.75 70 20.75 1.a Construct a payoff diagram for buying a $50 April call option on 3Com and a $50 April put option. Construct the diagram for the net payoff, i.e., after deducting option premia. 1.b Construct a payoff diagram for writing a $50 April call option on 3Com and a $50 April put option. Construct the diagram for the net payoff, i.e., after deducting option premia. 1.c Construct payoff diagrams for the following contracts, all maturing in February. Construct net payoff diagrams only, i.e., include the premium paid/received for the contracts and the price paid/received for stock. It may help to construct a payoff table for various future spot prices of 3Com. i. Buy one share and buy a put with X=$50 ii. Buy a put with X=$50 and write a call with X=$70 iii. Buy a call with X=$70 and buy a put with X=$50 iv. Buy a call with X=$50 and buy a put with X=$70
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v. Sell one share and buy a call with X=$70 vi. Buy one call with X=$50 and another one with X=$70. Write (sell) 2 calls with X=$60 vii. Buy one put with X=$50 and another one with X=$70. Write (sell) 2 puts with X=$60 1.d If the risk free rate of interest (continuously compounded) is 5%, does put-call parity hold for the April options with X=$50, X=$60 and X=$65? Make your calculations based on 71 days to maturity, assuming 365 day year 1.e Examine portfolios (iii) and (iv) from part 1.c. Which one is more expensive? Use put-call parity
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