1. An investeor buys a ratio spread of 1-year European calls. He buys 1 call option with strike price 40 and sell 2 call options with strike price 50. Option prices are (Strike price, Call option premium) = (40, 10), (50, 5) (a) Draw its profit plot. Formulas and explains regarding your plot are required. (b) 45, 55, 65. Determine the investor's profit if the end price of the underlying stock is

1. An investeor buys a ratio spread of 1-year European calls. He buys 1 call option with strike price 40 and sell 2 call options with strike price 50. Option prices are (Strike price, Call option premium) = (40, 10), (50, 5) (a) Draw its profit plot. Formulas and explains regarding your plot are required. (b) 45, 55, 65. Determine the investor's profit if the end price of the underlying stock is

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 5ST

See similar textbooks

Similar questions

An investor buys a 6-month European call option with an exercise price of $35 for $6, and sells a 6-month European call option with an exercise price of $40 for $4. a) What kind of a spread does this strategy create? Answer in terms of “Bull Spread” versus “Bear Spread”. b) Calculate both the total payoff and profit on this strategy at the expiration of the options. Please use a Table (as in the class notes) to identify the payoff and profit.
Suppose that a European call option to buy a share for $ 90.00 costs a . Under what circumstances will the SELLER of the option make a profit ? \$4.00 and is held until maturity . ( DRAW the GRAPH to show ALL answers ) b . when will the option be exercised ( at what price , show on graph ) ? c . What is the Maximum profit for SELLER and at what stock price ? d . What is the Maximum loss for SELLER and at what stock price ? e . What will be profit / loss for SELLER if St is 150 ?
An investor buys a European call option at a price of 7.6 yuan. The stock price is 52 yuan and the strike price is 55 yuan. Under what circumstances will the investor make a profit ? Under what circumstances will the option be executed ? Draw a diagram of the relationship between investor profitability and stock price at maturity.
An investor has purchased United States dollar call options, with an exercise price of A$1.15 anda premium of A$0.03 per unit.(a) Calculate the break-even price. (b) Calculate the profit or loss of the option for the investor if the spot rate at the time the investor considers exercising the options is : (1) A$1.10 (2) A$1.17 (3) A$1.23.(c) What is the maximum loss for the investor?(d) Explain why the investor could have an unlimited profit if the options are exercised.(e) Explain in general the similarities of and differences between a currency call option and a currency put option.
Suppose there is also a 1-year European put option on the same stock as in Question 3 with exercise price $30. The current stock price is also $25 and the stock price, in 1 year, will be either $35 (up by 40%) or $20 (down by 20%). The interest rate is 8%. This stock does not pay dividend. What is the value of the put option? Please use risk neutral probability method and assume discrete discounting. (2) What is put-call parity in option pricing? What needs to be true in order for put-call parity to hold?
Investor A wants to buy a European call option on Company N's stock. The call has a strike price of $100 and matures in 90 days. The price at t = 0 is $120 and the stock has a volatility of 40%. The risk-free rate is 6.38% per year. • Calculate the call price, using the Black-Sholes formula. • Calculate the put price with the same strike and maturity, using the put-call parity.
You are considering a European put option and a European call option on ABC Ltd and have available the following information. The put option with an exercise price of $15 and time to maturity of 60 days is priced at $2.00. The call option with the same exercise price and time to maturity is priced at $3.00. The underlying asset price is $15. The risk-free rate is 2% per 60 days. Could an arbitrage profit be earned? If so, how much the arbitrage profit is? Show your works (Hint: use discrete put-call parity equation and consider two scenarios for stock price at maturity of the options: $10 or $20).
Using put-call parity formula, derive expressions for the lower bounds for European call and put options. What is a lower bound for the price of (i) a three-month call option on a non-dividend-paying stock when the stock price is R860, the strike price is R760, and the risk-free interest rate is 10% per annum? (ii) a three-month European put option on a non-dividend-paying stock when the stock price is R500, the strike price is R610, and the discrete risk-free interest rate is 9% per annum?
Rebecca is interested in purchasing an European call on a hot new stock, Up, Inc. The call has a strike price of $100 and expires in 90 days . The current price of Up stock is $120, and the stock has a standard deviation of 40% per year. The risk-free interest rate is 6.18% per year. a). Using the Black - Scholes formula , compute the price of the call b). Use put-call parity to compute the price of the put with the same strike and expiration date
A trader buys a six-month European call option and sells a six-month European put option. The options have the same underlying asset and the same strike price K. Can you identify a forward contract that has the same payoff as the trader’s combined options position? Under what circumstances does the price of the call equal the price of the put? (HINT: In answering these questions you may find it helpful to draw charts of the payoffs or profits of the two positions.)
In an efficient market, a one-year call option on stock S with K = $25 is traded at$7.06, the current stock price S0 = $28.5, the expected market return is 7.5% and the T-Bill yield is 4%. You are about to purchase a one-year put option on the same stock with K = $26, someone offered it to you at a price of $3.6. Should you buy it?
Consider a European put and a European call option which are both written on a non-dividend paying stock, have the same strike price K = £80 and expire in T = 2 months. These options are trading for p = £21 and c = £30.80, respectively. The underlying stock price is S0 = £90. The continuously compounded risk-free rate of interest is r = 10% per annum. What is the present value of the arbitrage profit? Please explain your answer and show your workings. In your response, please show all cash flows (both today and at expiration) and explain why this is an arbitrage (i.e. risk-less) profit.