Use the following data for a fictitiously named company OPPS to answer the questions that follow: — The current stock price S is $23. — The time to maturity T is six months. — The continuously compounded, risk-free interest rate r is 5 percent per year. — European option prices are given in the following table: Strike Price Call Price Put Price K1 = $17.5 6.00 0.10 K2 = 20 4.00 0.50 K3 = 22.5 2.00 1.00 K4 = 25 1.00 2.50 You buy a call option with strike price K2 = 20 and sell a call option with strike price of K3 = 22.5. Then which of the following statements is INCORRECT? The derivative has zero-profit when the stock price at expiration is $21.5. You have set up a call spread. You have set up a bullish spread. The maximum loss is –$2 for a stock price at expiration less than or equal to $20. The maximum profit is $0.5 for a stock price at expiration greater than or equal to $22.5.
Use the following data for a fictitiously named company OPPS to answer the questions that follow: — The current stock price S is $23. — The time to maturity T is six months. — The continuously compounded, risk-free interest rate r is 5 percent per year. — European option prices are given in the following table: Strike Price Call Price Put Price K1 = $17.5 6.00 0.10 K2 = 20 4.00 0.50 K3 = 22.5 2.00 1.00 K4 = 25 1.00 2.50 You buy a call option with strike price K2 = 20 and sell a call option with strike price of K3 = 22.5. Then which of the following statements is INCORRECT? The derivative has zero-profit when the stock price at expiration is $21.5. You have set up a call spread. You have set up a bullish spread. The maximum loss is –$2 for a stock price at expiration less than or equal to $20. The maximum profit is $0.5 for a stock price at expiration greater than or equal to $22.5.
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 22P
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- Use the following data for a fictitiously named company OPPS to answer the questions that follow:
— The current stock price S is $23.
— The time to maturity T is six months.
— The continuously compounded, risk-free interest rate r is 5 percent per year.
— European option prices are given in the following table:
|
Strike Price |
Call Price |
Put Price |
|
K1 = $17.5 |
6.00 |
0.10 |
|
K2 = 20 |
4.00 |
0.50 |
|
K3 = 22.5 |
2.00 |
1.00 |
|
K4 = 25 |
1.00 |
2.50 |
You buy a call option with strike price K2 = 20 and sell a call option with strike price of K3 = 22.5. Then which of the following statements is INCORRECT?
- The derivative has zero-profit when the stock price at expiration is $21.5.
- You have set up a call spread.
- You have set up a bullish spread.
- The maximum loss is –$2 for a stock price at expiration less than or equal to $20.
- The maximum profit is $0.5 for a stock price at expiration greater than or equal to $22.5.
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