apamaideaQ1. The e price of a stock is currently $45. The price of a two year European call option on the stock with a strike price of $50 is $3.50 and the price of a two year European put option on the stock with a strike price of $40 is $2.50.
a. Suppose that an investor buys 100 shares of stock, shorts 100 call options, and buys 100 put options. Construct a table showing the investor’s profits (not pay off) as a function of the stock price at expiration. If you do not understand the difference between profit and pay off, please review week 1 materials. In addition, please remember that when the investor shorts an option, he receives the option price upfront. For example, if you short sell 1 call option, you will receive $3.50.
Hints: To answer part a, construct a column in excel of stock prices ranging from $1 to $100 in increments of $1. Then use the next 3 columns to calculate the stock, call, put profits (one column for each position). Pay attention to whether the investor is taking a long or a short position of the option. Then add all the profits from these three positions (stock, call, put). Finally, uses excel to graph the portfolio profits (y-axis) as a function of stock price (x-axis). Specifically, use scatter plot in excel. If you don’t know how, then type “scatter plot” in excel help and follow the instruction.
b. The set of actions in part a is called a “collar” strategy. Explain when an investor will use this collar strategy.
c: Suppose now that the investor buys 100 stocks, shorts 200 call options, and buys 200 put options. Construct a table on structatable showing the in vector’s Prof It or loss as a function of the stock price at expiration. Graph the portfolio prof it as a function of stock price. The total profit should look like a zigzag (down /u p /down) pattern.
Q2: What are the differences between (a) exchange traded call options and (b) warrants /employee stock options/convertibles?
Q3: If you exercise an inthe money call option, you will make a profit. Explain whether this is true or false.
12 years ago
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answer.xlsx
