93 if ibm sells at 110 on the option expiration date

Info icon This preview shows pages 10–15. Sign up to view the full content.

View Full Document Right Arrow Icon
money, and profit = $6.93. If IBM sells at $110 on the option expiration date, the call written results in a cash outflow of $5 at expiration, and an overall profit of: $6.93 – $5.00 = $1.93 c.You break even when either the put or the call results in a cash outflow of $6.93. For the put, this requires that: $6.93 = $100.00 – S T S T = $93.07 For the call, this requires that: $6.93 = S T – $105 S T = $111.93 d. The investor is betting that IBM stock price will have low volatility. This position is similar to a straddle. 20-10
Image of page 10

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Chapter 20 - Options Markets: Introduction 18. The put with the higher exercise price must cost more. Therefore, the net outlay to establish the portfolio is positive. Position S T < 90 90 S T 95 S T > 95 Write put, X = $90 –(90 – S T ) 0 0 Buy put, X = $95 95 – S T 95 – S T 0 Total 5 95 – S T 0 The payoff and profit diagram is: 0 S T Payoff 5 90 95 Profit Net outlay to establish position 19. Buy the X = 62 put (which should cost more but does not) and write the X = 60 put. Since the options have the same price, your net outlay is zero. Your proceeds at expiration may be positive, but cannot be negative. Position S T < 60 60 S T 62 S T > 62 Buy put, X = $62 62 – S T 62 – S T 0 Write put, X = $60 –(60 – S T ) 0 0 Total 2 62 – S T 0 0 S T 2 60 62 Payoff = Profit (because net investment = 0) 20-11
Image of page 11
Chapter 20 - Options Markets: Introduction 20. The following payoff table shows that the portfolio is riskless with time-T value equal to $10: Position S T 10 S T > 10 Buy stock S T S T Write call, X = $10 0 –(S T – 10) Buy put, X = $10 10 – S T 0 Total 10 10 Therefore, the risk-free rate is: ($10/$9.50) – 1 = 0.0526 = 5.26% 21. a., b. Position S T < 100 100 S T 110 S T > 110 Buy put, X = $110 110 – S T 110 – S T 0 Write put, X = $100 –(100 – S T ) 0 0 Total 10 110 – S T 0 The net outlay to establish this position is positive. The put you buy has a higher exercise price than the put you write, and therefore must cost more than the put that you write. Therefore, net profits will be less than the payoff at time T. 0 S T 110 100 10 Payoff Profit c.The value of this portfolio generally decreases with the stock price. Therefore, its beta is negative. 20-12
Image of page 12

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Chapter 20 - Options Markets: Introduction 22. a.Joe’s strategy Position Cost Payoff S T 400 S T > 400 Stock index 400 S T S T Put option, X = $400 20 400 – S T 0 Total 420 400 S T Profit = payoff – $420 –20 S T – 420 Sally’s strategy Position Cost Payoff S T 390 S T > 390 Stock index 400 S T S T Put option, X = $390 15 390 – S T 0 Total 415 390 S T Profit = payoff – $415 –25 S T – 415 Profit Joe Sally -20 -25 390 400 S T b. Sally does better when the stock price is high, but worse when the stock price is low. The break-even point occurs at S T = $395, when both positions provide losses of $20. c.Sally’s strategy has greater systematic risk. Profits are more sensitive to the value of the stock index. 20-13
Image of page 13
Chapter 20 - Options Markets: Introduction 23. a., b. (See graph below) This strategy is a bear spread. Initial proceeds = $9 – $3 = $6 The payoff is either negative or zero: Position S T < 50 50 S T 60 S T > 60 Buy call, X = $60 0 0 S T – 60 Write call, X = $50 0 –(S T – 50) –(S T – 50) Total 0 –(S T – 50) –10 c.Breakeven occurs when the payoff offsets the initial proceeds of $6, which occurs at stock price S T = $56. The investor must be bearish: the position does worse when
Image of page 14

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 15
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern