80 68 9 20 10 profit diagram for 4000 3000

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6.80 190 6.8 200 6.8 210 6.8 20-9
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20-10
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Profit diagram for problem 11: -50.00 -40.00 -30.00 -20.00 -10.00 0.00 10.00 20.00 30.00 40.00 50.00 0 50 100 150 200 250 130 Straddle Bullish Spread 15. i. Equity index-linked note: Unlike traditional debt securities that pay a scheduled rate of coupon interest on a periodic basis and the par amount of principal at maturity, the equity index-linked note typically pays little or no coupon interest; at maturity, however, a unit holder receives the original issue price plus a supplemental redemption amount, the value of which depends on where the equity index settled relative to a predetermined initial level. ii. Commodity-linked bear bond: Unlike traditional debt securities that pay a scheduled rate of coupon interest on a periodic basis and the par amount of principal at maturity, the commodity-linked bear bond allows an investor to participate in a decline in a commodity’s price. In exchange for a lower than market coupon, buyers of a bear tranche receive a redemption value that exceeds the purchase price if the commodity price has declined by the maturity date. 20-11
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16. a. Position S T < 80 80 S T 85 S T > 85 Write call, X = $85 0 0 –(S T – 85) Write put, X = $80 –(80 – S T ) 0 0 Total S T – 80 0 85 – S T S T 80 85 Payoff Write call Write put b. Proceeds from writing options: Call: $0.95 Put: $0.55 Total: $1.50 If IBM sells at $83 on the option maturity date, both options expire out of the money, and profit = $1.50. If IBM sells at $90 on the option maturity date, the call written results in a cash outflow of $5 at maturity, and an overall profit of: $1.50 – $5 = $3.50 c. You break even when either the put or the call results in a cash outflow of $1.50. For the put, this requires that: $1.50 = $80.00 – S T S T = $78.50 For the call, this requires that: $1.50 = S T – $90 S T = $91.50 d. The investor is betting that IBM stock price will have low volatility. This position is similar to a straddle. 20-12
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17. 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 18. 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 maturity 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) 20-13
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19. According to put-call parity (assuming no dividends), the present value of a payment of $85 can be calculated using the options with April maturity and exercise price of $85. PV(X) = S
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80 68 9 20 10 Profit diagram for 4000 3000

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