Consider the following option portfolio: You write a January 2012 expiration call option on IBM with exercise price $168, and the priceof the call option is $8.93. You also write a January expiration IBM put option with exercise price $163, the price of the put option is$10.85.Instructions: for parts a, b, and c, enter your answer as a decimal rounded to the nearest cent.a. What will be the profit/loss on this position if IBM is selling at $162 on the option expiration date? $b. What will be the profit/loss on this position if IBM is selling at $174 on the option expiration date? $c. At what two stock prices will you just break even on your investment (i.e., zero net profit)?For the put, this requires that: $For the call this requires that: $d. What kind of “bet" is this investor making; that is, what must this investor believe about IBM's stock price in order to justify theposition?betting that the IBM stock price will go up.betting that the IBM stock price will go down.betting that the IBM stock price will have low volatility.betting that the IBM stock price will have high volatility.

Question
Asked Dec 9, 2019
17 views

Need help on all

Consider the following option portfolio: You write a January 2012 expiration call option on IBM with exercise price $168, and the price
of the call option is $8.93. You also write a January expiration IBM put option with exercise price $163, the price of the put option is
$10.85.
Instructions: for parts a, b, and c, enter your answer as a decimal rounded to the nearest cent.
a. What will be the profit/loss on this position if IBM is selling at $162 on the option expiration date? $
b. What will be the profit/loss on this position if IBM is selling at $174 on the option expiration date? $
c. At what two stock prices will you just break even on your investment (i.e., zero net profit)?
For the put, this requires that: $
For the call this requires that: $
d. What kind of “bet" is this investor making; that is, what must this investor believe about IBM's stock price in order to justify the
position?
betting that the IBM stock price will go up.
betting that the IBM stock price will go down.
betting that the IBM stock price will have low volatility.
betting that the IBM stock price will have high volatility.
help_outline

Image Transcriptionclose

Consider the following option portfolio: You write a January 2012 expiration call option on IBM with exercise price $168, and the price of the call option is $8.93. You also write a January expiration IBM put option with exercise price $163, the price of the put option is $10.85. Instructions: for parts a, b, and c, enter your answer as a decimal rounded to the nearest cent. a. What will be the profit/loss on this position if IBM is selling at $162 on the option expiration date? $ b. What will be the profit/loss on this position if IBM is selling at $174 on the option expiration date? $ c. At what two stock prices will you just break even on your investment (i.e., zero net profit)? For the put, this requires that: $ For the call this requires that: $ d. What kind of “bet" is this investor making; that is, what must this investor believe about IBM's stock price in order to justify the position? betting that the IBM stock price will go up. betting that the IBM stock price will go down. betting that the IBM stock price will have low volatility. betting that the IBM stock price will have high volatility.

fullscreen
check_circle

Expert Answer

Step 1

a-b

Calculation of Risk-Free Rate:

a. The profit or loss at current price of $162 is $18.78.

b. The profit or loss at current price of $174 is $13.78.

c. The break-even of put is $143.22 and break-even of put is $187.78.

d. The correct option is “Option C”.

Excel Spreadsheet:

help_outline

Image Transcriptionclose

A Question a 2 Exercise Price of January 2012 3 Price of January 2012 4 Exercise Price of January Put 5 Price of Jamuary Put $168 $8.93 $163 $10.85 Current Selling Price $162 6 Profit or Loss $18.78 Question b 10 Exercise Price of January 2012 11 Price of January 2012 12 Exercise Price of January Put 13 Price of January Put 14 Current Selling Price $168 $8.93 $163 $10.85 $174 Profit or Loss 15 $13.78 16 Question c 18 Exercise Price of January 2012 19 Price of January 2012 20 Exercise Price of January Put 21 Price of Jamuary Put 17 $168 $8.93 $163 $10.85 22 Break-Even of Put $143.22 23 Break-Even of Call $187.78

fullscreen
Step 2

Excel Workings:

...
help_outline

Image Transcriptionclose

B A Question a 2 Exercise Price of January 2012 168 3 Price of January 2012 4 Exercise Price of January Put 5 Price of January Put 8.93 163 10.85 6 Current Selling Price 162 Profit or Loss |=(B3+B5)- (MAX((B6-B2),0)+MAX(B4-B6),0)) Question b 10 Exercise Price of January 2012 168 11 Price of January 2012 12 Exercise Price of January Put 13 Price of January Put 14 Current Selling Price 8.93 163 10.85 |174 |-(B11+B13)- (MAX((B14-B10),0)+MAX((B12-B14),0)) 15 Profit or Loss 16 17 Question c 18 Exercise Price of January 2012 168 8.93 19 Price of January 2012 20 Exercise Price of January Put 163 21 Price of January Put 10.85 Break-Even of Put =B20-(B19+B21) =B18+(B19+B21) 22 Break-Even of Call 23

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in
BusinessFinance

Derivative Markets

Related Finance Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Please show all equations and work as needed. If possible, please type the work so that it may be co...

A: Calculation of Coach’s annual salary using excel is as follows:

question_answer

Q: You own a furniture manufacturing company. You are looking to expand into glass furniture and need t...

A: ARR refers to accounting rate of return, it is the percentage return on a project with respect to it...

question_answer

Q: A company pays a constant $8.25 dividend on its stock. The company will maintain this dividend for t...

A: Hi, due to unavailability of HP10bii+ Financial calculator, we will answer this question using excel...

question_answer

Q: What is the depreciation using straight line deprectiation over 12 years, what is the revenue earned...

A: Note: Present value of Detroit engine warranty given is incorrect. Present value of Detroit engine i...

question_answer

Q: What is the company’s cost of capital? 1. CAPM = rrf + (rm – rrf)B = required rate of return on equi...

A: 1.Risk-Free Rate (rrf) = 3% or 0.03Market Premium (rm – rrf) = 5% or 0.05Beta (B) = 1.2 Computation ...

question_answer

Q: Weighted average cost of​ capital) The target capital structure for Jowers Manufacturing is 50 perce...

A: Calculation of Weighted Average Cost of​  Capital:The weighted average cost of​  capital is 14.11%.E...

question_answer

Q: To calculate the after-tax cost of debt, multiply the before-tax cost of debt by Western Gas & Elect...

A: Question 1:To calculate the after-tax cost of debt, multiply the before-tax cost of debt by “1-Tax R...

question_answer

Q: O 1 75% AT&T LTE 11:52 AM Exit 31 5. Loki, Inc. and Thor, Inc. have entered into a stock-swap merger...

A: Stock swap merger agreement refers to exchange of one equity based asset for the other. This is done...

question_answer

Q: Floyd Industries stock has a beta of 1.25. The company just paid a dividend of $.40, and the dividen...

A: a.The formula to calculate value of stock using dividend discount model is given below: