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1. Fahad gets into a long European call option to purchase one share of stock X for $95 that costs $5 and is held until maturity. Under what circumstances will Fahad make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option.

1. Fahad gets into a long European call option to purchase one share of stock X for $95 that costs $5 and is held until maturity. Under what circumstances will Fahad make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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0:T. Assignment 2... +966 55 670 8009 1. Fahad gets into a long European call option to purchase one share of stock X for $95 that costs $5 and is held until maturity. Under what circumstances will Fahad make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option. 2. Assume that Sara gets into a short European put option to sell one share of stock Y for $66 that costs $7 and is held until maturity. Under what circumstances will Sara, the seller of the option (the party with the short position), make a profit? Under what circumstances will the option be exercised (from long position perspective)? Draw a diagram illustrating how the profit from a short position in the option depends on the stock price at maturity of the option. 3. Consider a call option contract to purchase 1000 shares with a strike price of $80 and maturity in four months. Explain how the terms of the option contract change when there is: a) A 11% cash dividend b) A 5-for-1 stock split 4. What is the initial margin requirement for an investor who shorts (writes or sells) four naked call option contracts with option price of $4, strike price of S50, and stock price of $47? 5. What is the difference between a strangle and a straddle? 6. Call options on a stock are available with strike prices of $15, $17.50 and $20, and expiration dates in 3 months. Their prices are $4, $2, and $12, respectively. Explain how the options can be used to create a butterfly spread. 7. A call option with a strike price of $100 costs $5. A put option with a strike price of $85 costs $4. a. Explain how a strangle can be created from these two options. b. What is the cost of this strategy? c. When should I exercise my options? d. For what range of future stock prices would the strategy lead to a gain and what is the maximum gain you can receive? Prove your answer by providing an example. e. For what range of future stock prices would the strategy lead to a loss and what is the maximum loss you could sustain? Prove it by giving an example. 8. Suppose that put options on a stock with strike prices $66
Transcribed Image Text:0:T. Assignment 2... +966 55 670 8009 1. Fahad gets into a long European call option to purchase one share of stock X for $95 that costs $5 and is held until maturity. Under what circumstances will Fahad make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option. 2. Assume that Sara gets into a short European put option to sell one share of stock Y for $66 that costs $7 and is held until maturity. Under what circumstances will Sara, the seller of the option (the party with the short position), make a profit? Under what circumstances will the option be exercised (from long position perspective)? Draw a diagram illustrating how the profit from a short position in the option depends on the stock price at maturity of the option. 3. Consider a call option contract to purchase 1000 shares with a strike price of $80 and maturity in four months. Explain how the terms of the option contract change when there is: a) A 11% cash dividend b) A 5-for-1 stock split 4. What is the initial margin requirement for an investor who shorts (writes or sells) four naked call option contracts with option price of $4, strike price of S50, and stock price of $47? 5. What is the difference between a strangle and a straddle? 6. Call options on a stock are available with strike prices of $15, $17.50 and $20, and expiration dates in 3 months. Their prices are $4, $2, and $12, respectively. Explain how the options can be used to create a butterfly spread. 7. A call option with a strike price of $100 costs $5. A put option with a strike price of $85 costs $4. a. Explain how a strangle can be created from these two options. b. What is the cost of this strategy? c. When should I exercise my options? d. For what range of future stock prices would the strategy lead to a gain and what is the maximum gain you can receive? Prove your answer by providing an example. e. For what range of future stock prices would the strategy lead to a loss and what is the maximum loss you could sustain? Prove it by giving an example. 8. Suppose that put options on a stock with strike prices $66
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