Session 12R - COMM308 AA Fall 2012

Assume instead of holding one call option with

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Unformatted text preview: tion with Exercise price of K=60$ * max{ S1 − $60,0} Payoff = 1000 Stock Price (St) 1$ 10 32 40 50 60 100 110 Call Payoff 0 0 0 0 0 0 40,00 0 50,00 0 Short a call Short position: Sell the security You buy a call, I sell it to you! Or I write a call ◦ I Meaning: If you decide to Exercise your Right, I have to provide you the stock with cheap price write one call option on apple share for exercise 600$ and Expiry of Jan 2013. You buy it. Short positions Payoff(profit) is multiplied by ‘-1’ Assume instead of holding one call option with Exercise price 60$, you sold( or have a short position) one call options with exercise price of 60$ Step3c: Payoff for Call option with Exercise price of K=60$ Payoff = (−1) * max{ S1 − $60,0} Stock Price (St) 1$ 10 32 40 50 60 100 110 Call Payoff 0 0 0 0 0 0 -40 -50 b) (1 Point) Consider a call option on Third Mug Inc. stock with a strike price of $35 and time to expiration of one year. This option sells for $2. Consider another call option on Third Mug Inc. stock with a strike price of $32 and time to expiration of one year. Do you expect the second option (strike $32) to be more or less expensive than the first option (strike $35) above? Why? More Expensive. Lower strike price makes the call option more valuable. Problems with IRR: Multiple IRRs There are two IRRs for this project: $200 NPV 0 1 ­$200 $800 Which one should we use? 2 3 ­ $800 $100.00 100% = IRR2 $50.00 $0.00 -50% 0% ($50.00) ($100.00) ($150.00) 50% 0% = IRR1 100% 150% 200% Discount rate Betas Beta of a portfolio is the weighted average of individual security betas: β P = w1 β1 + w2 β 2 + ... + wn β n [9-7] What is the beta of the portfolio? Stock A B C $5,000 $10,000 $15,000 a) Amount 0.98 invested b) 1.15 Stock Beta 1.20 1.80 0.70 c) 1.19 d) 1.21 e) 1.23 Ans: ◦) B (Final exam Fall 2010, Question 25)...
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This note was uploaded on 07/01/2013 for the course COMM Comm 308 taught by Professor Kavehmoradi during the Fall '12 term at Concordia University Irvine.

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