b. Using the options in the following table construct a long call spread (bull spread) strategy, that will pay an increasing amount after ST> £10, up to a maximum of £200 when ST 2 £15. Provide all the details and calculate the cost of the strategy and draw the payoff diagram (ignore the premium for payoff diagram). Option type £10 strike call £15 strike call Premium £1 £0.5

b. Using the options in the following table construct a long call spread (bull spread) strategy, that will pay an increasing amount after ST> £10, up to a maximum of £200 when ST 2 £15. Provide all the details and calculate the cost of the strategy and draw the payoff diagram (ignore the premium for payoff diagram). Option type £10 strike call £15 strike call Premium £1 £0.5

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

Problem 1PS

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You would like to be holding a protective put position on thestock of XYZ Co. to lock in a guaranteed minimum value of $100at year-end. XYZ currently sells for $100. Over the next year, thestock price will increase by 10% or decrease by 10%. The T-billrate is 5%. Unfortunately, no put options are traded on XYZ Co.a. Suppose the desired put option were traded. How muchwould it cost to purchase?b. What would have been the cost of the protective putportfolio?
If put options on USD with a strike price of AUD6.9/USD have a premium of AUD4.3, what is the break- even price (BEP) for a buyer or a seller of these options? Assume that there are no brokerage fees. Question Answer a. The buyer's BEP is AUD 2.6000 and the seller's BEP is AUD 11.2000 b. The buyer's BEP is AUD 2.6000 and the seller's BEP is AUD 2.6000 c. The buyer's BEP is AUD 11.2000 and the seller's BEP is AUD 11.2000 d. The buyer's BEP is AUD 11.2000 and the seller's BEP is AUD 2.6000 e. The buyer's BEP is AUD 6.9000 and the seller's BEP is AUD 11.2000
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.
Please correct my understanding under below situation and answer some question in below situation... text that inside " simbol is from the book. "Scenerio 1: Current SET50 index is 875 points. Mr.A Anticipate SET50 to significantly rise so Mr.A Open 1 long position on a call option at strike price 875 points and pay premium 25 points. Mr. B short this call option. Now Mr.A & Mr.B is counterparty." (I doubt that Can Mr.B open short call position before counterparty open long call position and Mr.B must have underlying asset of the option or not, if not in expiration date, counterparty exercise this call option what's happen to Mr.B) "Before expiration date SET50 index is 890. Suppose premium is then 47 points. Mr A make decion to short close this option(close out before expiration). Then Mr.A earn the premium” In my understanding A will earn the premium equal to 47 minus 25 point by short closed this option and I doubt whether this long call 1 position at 47 points will be closed by…
Suppose you buy one SPX call option contract with a strike of 2200. At maturity, the S&P 500 index is at 2218. What is your net gain or loss if the premium you paid was $14? (Input the amount as a positive value.)
Consider a one-period binomial model in which the underlying is at 65 and can go up 30% and down 22%. The risk-free rate is 8%. The price of the call option with exercise prices of 70 would be: a. 84.50 b. 0.5769 c. 0 d. 7.75 Refer to Problem #1. Suppose that the call is selling for 9 in the market and assume that we would execute an arbitrage transaction, the rate of return on a 10,000 call option would be: a. 16.20% b. 18.19% c. 15.17% d. 16.78%
Suppose that, in each period, the cost of a security either goes up by a factor of 2 or goes down by a factor of 1/2 (i.e. u=2, d=1/2). If the initial price of the security is 100, determine the no-arbitrage cost of a call option to purchase the security at the end of two periods for a price of 150.
You buy an American call option priced at $0.025/€ on €225,000 at a strike price of $1.50/€. You wait until expiration date where the observed price is $1.40/€. What is total net cash flow involved at the end of this investment whether you exercise or do not exercise this option? [Ignore TVM]
Options2. Construct profit diagrams at expiration time to show what position in META puts, calls and/or underlying stock best expresses the investor’s objectives described below. META currently sells for $210 so that profit diagrams between $150 and $250 in $10 increments are appropriate. Assume that at-the-money puts and calls currently cost$30 each. The call with strike $190 costs $40 and the call with strike $230 costs $20. (a) An investor wants to benefit from META price drops but does not want to lose more than $30 on the investment. (b) An investor wants to have a positive payoff if the upcoming META earnings announcement is close to market expectations—meaning that the price will not move by more than $20 dollars.
I asked this question yesterday: Suppose that, in each period, the cost of a security either goes up by a factor of 2 or goes down by a factor of 1/2 (i.e. u=2, d=1/2). If the initial price of the security is 100, determine the no-arbitrage cost of a call option to purchase the security at the end of two periods for a price of 150. In the answer I got today the first step said: "We assume that the probability of moving up and moving down be 50% each, which means equal chances for both the movements. " I had learned that the risk neutral probability for the stock price to go up is: p=(1+r-d)/(u-d). In this particular problem, we'd have p=(1+0-.5)/(2-.5)=1/3. And so the probability going down would be 1-p or 2/3. Thus, my question is why weren't these probabilities used in the solution previously sent? And if they should be, what would be the new solution to the problem? Thank you for your help. I'm new to learning all of this and some of it is hard for me to understand.
Assume that price of a USDINR call option is quoted as INR 0.25 / 0.27 (bid price / ask price). Given this quote, at what price could a company buy the call option?
Topic: Option Pricing When computing, please do not round off. Only final answers must be rounded off to two decimal places Based on the Black-Scholes model, the price of a put option should be P2,800. If the underlying asset has a strike price of P60,000 and a market price of P58,500, how much is the extrinsic value of the option?

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