Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Chapter 15, Problem 24PS
A put option with strike price
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A FinCorp put option with strike price 60 trading on the Acme options exchange sells for $2. To your amazement, a FinCorp put with the same maturity selling on the Apex options exchange but with strike price 62 also sells for $2. If you plan to hold the options positions to expiration, devise a zero-net-investment arbitrage strategy to exploit the pricing anomaly. Draw the profit diagram at expiration for your position.
Suppose S = $98, K = $100, u = 1.08, d = 0.94 a one period put option with delta of -0.10000 should sell for $1.41 but it selling in the market for $1.47. this leads to an arbitrage opportunity that can be accomplished by selling 0.10000 units of stocks invested at $80.00 for one period at the rate of 1.04 and selling the put. Does this lead to arbitrage profits?
You buy a put option on IBM common stock. The option has an exercise price of $136 and IBM’s stock currently trades at $140. The option premium is $5 per contract.a. What is your net profit on the option if IBM’s stock price increases to $150 at expiration of the option and you exercise the option?
b. How much of the option premium is due to intrinsic value versus time value?c. What is your net profit if IBM’s stock price decreases to $130?d. Draw the payout diagram at maturity on a short put option position, option premium = $2, and the same exercise price...
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Chapter 15 Solutions
Essentials Of Investments
Ch. 15.2 - Plot the rate of return to the call-plus-bills...Ch. 15.2 - Prob. 2EQCh. 15 - Prob. 1PSCh. 15 - Prob. 2PSCh. 15 - Prob. 3PSCh. 15 - Prob. 4PSCh. 15 - Prob. 5PSCh. 15 - Prob. 6PSCh. 15 - Prob. 7PSCh. 15 - The following diagram shows the value of a put...
Ch. 15 - You are a portfolio manager who uses Options...Ch. 15 - An investor purchases a stock for 38 and a put for...Ch. 15 - ll. Imagine that you are holding shares of stock,...Ch. 15 - Prob. 12PSCh. 15 - The common stock of the R.U.I.T. Corporation has...Ch. 15 - 14. The common stock of the C.A.L.L. Corporation...Ch. 15 - Prob. 15PSCh. 15 - Prob. 16PSCh. 15 - Prob. 17PSCh. 15 - Prob. 18PSCh. 15 - Prob. 19PSCh. 15 - In what ways is owning a corporate bond similar to...Ch. 15 - Prob. 21PSCh. 15 - Consider the following options portfolio: You...Ch. 15 - Consider the following portfolio. You write a put...Ch. 15 - A put option with strike price 300 on the Acme...Ch. 15 - You buy a share of stock, mite a one-year call...Ch. 15 - Joe Finance has just purchased a stock-index fund,...Ch. 15 - You write a call option with X=50 and buy a call...Ch. 15 - Devise a portfolio using only call options and...Ch. 15 - Prob. 29CCh. 15 - Prob. 1CPCh. 15 - Prob. 2CPCh. 15 - Prob. 3CPCh. 15 - Prob. 4CPCh. 15 - Prob. 5CPCh. 15 - Prob. 1WM
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- I2 Consider a pair of call and put options with the same expiration date but different strike prices. Theput option has a strike price of $45 and is currently priced at $6.00. The call option has a strike priceof $35 and is currently trading at a price of $6.50. The current stock price is $40 per share. A traderis evaluating a trading strategy involving the following option positions: Long 1 put options (with strike price $45) Long 2 call option (with strike price $35) a)Draw a figure/graph illustrating the profit/loss of the trading strategy. Make sure you scale and labelall the lines and points properly so that gains and losses are clearly shown.b)For what range of stock prices would the trader end up with a profit if the strategy is executed?c)Discuss the main characteristics of this strategy. When is it appropriate to use such a strategy?arrow_forward1. Suppose you have the following information concerning a particular options.Stock price, S = RM 21Exercise price, K = RM 20Interest rate, r = 0.08Maturity, T = 180 days = 0.5Standard deviation, � = 0.5 The Call option value is 3.77. and put option value is 1.99 Suppose a European put options has a price higher than that dictated by the putcall parity. a. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless. Note: Use the call and put options prices above)b. Name the options/stock strategy used to proof the put-call parity. explainc. What would be the extent of your profit in (a) depend on? explainarrow_forward1. Suppose you have the following information concerning a particular options.Stock price, S = RM 21Exercise price, K = RM 20Interest rate, r = 0.08Maturity, T = 180 days = 0.5Standard deviation, � = 0.5 The Call option value is 3.7739. and put option value is 1.8101 Suppose a European put options has a price higher than that dictated by the putcall parity. a. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless. Note: Use the call and put options prices above)b. Name the options/stock strategy used to proof the put-call parity. c. What would be the extent of your profit in (a) depend on?arrow_forward
- A one-year call option on a stock with strike price of $90 costs $6 and a one-year put option on the same stock with strike price of $90 costs $7. Suppose that a trader buys one call option and one put option. a. What is the breakeven stock price, above which the trader makes a profit? b. What is the breakeven stock price, below which the trader makes a profit?arrow_forwardSuppose that a European call option to buy a share for $100.00 costs $5.00 and is held untilmaturity. Under what circumstances will the holder of the option make a profit? Underwhat circumstances will the option be exercised? Draw a diagram illustrating how the profitfrom a long position in the option depends on the stock price at maturity of the option. Suppose that a European put option to sell a share for $60 costs $8 and is held untilmaturity. Under what circumstances will the seller of the option (the party with the shortposition) make a profit? Under what circumstances will the option be exercised? Draw adiagram illustrating how the profit from a short position in the option depends on thestock price at maturity of the option.arrow_forward2. Suppose you have the following information concerning a particular options.Stock price, S = RM 21Exercise price, K = RM 20Interest rate, r = 0.08Maturity, T = 180 days = 0.5Standard deviation, = 0.5a. What is correct of the call options using Black-Scholes model? b. Compute the put options price using Black-Scholes model. 3Suppose a European put options has a price higher than that dictated by the putcall parity.a. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless.Note: Use the call and put options prices you have computed in the previous question 2 above.b. Name the options/stock strategy used to proof the put-call parity. c. What would be the extent of your profit in (a) depend on?arrow_forward
- You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $100 at year-end. XYZ currently sells for $100. Over the next year the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on XYZ Co.a. Suppose the desired put option were traded. How much would it cost to purchase?b. What would have been the cost of the protective put portfolio?c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = 100? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put.arrow_forwardA call option on Jupiter Motors stock with an exercise price of $40 and one-year expiration is selling at $2. A put option on Jupiter stock with an exercise price of $40 and one-year expiration is selling at $1.5. If the risk-free rate is 9% and Jupiter pays no dividends, what should the stock price be? Assume there is no dividends. (Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forwardMetaAn investor buys a put option contract for S of IBM Inc. stock, with a contract size of ton shares. The stock price is currently $35, and the exercise price is $10. What are the investor's expectations, and under what conditions does the investor make a profit? (1) Is this put option in-the-money? ii) Under what circumstances will the option be exercised? (iv) If at the expiration of the option, the stock price is $ so calculate the profit/loss of the investment and explain what the transactions are? Shall the investor exercise this option?arrow_forward
- Mr. Eisner sold 10 Microsoft put options and bought 5 Microsoft call options. Both options have the same exercise price of $80 and the same expiration date. Draw the payoff diagram with respect to the price of Microsoft stock at expiration. The solution provided for this question is attched. But I dont understand the payoff for sold put options, if the stock price is less than the strike price then shouldn't the seller would be at loss? why is it given (St-80) and if the stock price is greater than the strike price then shouldnt the seller gain profit? of the premium then why is it given 0? Please explain in simple terms, steo by step.arrow_forwardIf 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 11.2000arrow_forwardYou have written a call option on Walmart common stock. The option has an exercise price of $81, and Walmart’s stock currently trades at $79. The option premium is $1.60 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit if Walmart’s stock price decreases to $77 and stays there until the option expires? c. What is your net profit on the option if Walmart’s stock price increases to $87 at expiration of the option and the option holder exercises the option?arrow_forward
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