FINANCE IN EXCEL
patrne
chapter.xlsxChapter 20 problem 3
| Chpater 20 Problem 3 (a-c) | |||
| suppose that an investor holds a share of Sophia common stock, currently valued at $ 50. She is concerned that over the next few week months | |||
| She is concerned that over the next few months the value of her holding might decline, and she would like to hedge that risk by | |||
| suplementing her holding with one of 3 different derivative positions, all of which expire at the same point in the future | |||
| (1) A short position in a forward with a contract price of $ 50 | |||
| (2) A long position in a put call option with an exercise price of $ 50 and a front-end premium expense of $ 3.23 | |||
| (3) A short position in a call option wqith an exercise price of $ 50 and a front-end premium receipt of $ 5.20 | |||
| Expiration Date Sophia Stock Price | Expiration Date Derivative Payoff | Initial Derivative Premium | Combined Terminal Position Value |
| $ 25.00 | 25 | 0 | $ 50.00 |
| 30 | 20 | 0 | 50 |
| 35 | 15 | 0 | 50 |
| 40 | 10 | 0 | 50 |
| 45 | 5 | 0 | 50 |
| 50 | 0 | 0 | 50 |
| 55 | -5 | 0 | 50 |
| 60 | -10 | 0 | 50 |
| 65 | -15 | 0 | 50 |
| 70 | -20 | 0 | 50 |
| 75 | -25 | 0 | 50 |
| a)- Using a table similar to the following, calculate the expiration date value of the investor's combined position in calculating net porfolio value, ignore the time differential between the initial derivative expense | |||
| or receipt and the terminal payoff | |||
| b)- For each of 3 hedge porfolios, graph the epxiration date value of her combined position on the vertical axis, with potential expiration date share prices of Sophia Stock on the horizontal axis | |||
| c)- Assumin that the options are pirced fairly, use the concept of put- call parity to calculate the zero-value contract price for a forward agreement on Sophia stock. | |||
| Explain why value differes from the $ 50 contract priced in Part a and Part b |
Chapter 20 problem 5 (a-c)
| Chapter 20 problem 5 (a-c) |
| The common stock of company XYZ is currently trading at a price of $ 42. Both a put call and a call option are available for XYZ stock , each having an |
| exercise price of $ 40 and an expiration date in exaclty six months. The current market prices for the put and call are $ 1.45 and $ 3.90 respectively. |
| The risk free holding period return for the next six months is 4%, which correspond to an 8% annual rate |
| a)- For each possible stock price in the following sequence, calcualte the expiration date payoffs ( net of the initial purchase price) for the following posiitions (1) buy one XYZ call option, and (2) short one XYZ call option |
| 20, 25, 30, 35, 40, 45, 55, 60 |
| Draw aa graph of these payoff relationships using the net profit on the vertical exis and potential expiration dat stock price on the horizontal axis. Be sure to specify the prices at which these respectives positions will break even |
| b)- Using the same potential stock prices as in part a, calcualte the expiration date payoffs and profits ( net of initial purchase price ) for the following positions (1) buy one XYZ put option, and short one |
| XYZ put option. Draw a graph of these relationships, labelling the prices at which these investments will break even |
| c)- Determine whether the $ 2.45 difference in the market prices betweeen the call and put options is consistent with the put -call parity relationship for Eurpean-style contracts. |
Chapter 20 Problem 8 (a-c)
| Chapter 20 Problem 8 (a-c) |
| As an option trader, you are constantly looking for opportunities to make an abritrage transaction ( a trade in which you do not need to commit your own capital or take any risk but caan still make a profit) |
| Suppose you observe the following prices for options on DRKC Co, stocl: $ 3.18 for a call with an exercise price of $ 60 and $ 3.38 for a put with an exercise price of $ 60. Both options expire in exaclty seix months |
| and the price of six month T bill is $ 97.00 (for face value of $ 100) |
| a)- Using the put-call-spot parity condition, demonstrate graphically how you could synthetically recreate the payoff structure of a share of DRKC stock in six months using a combination of puts, and Tbills transacted today |
| b)- Given the current market pricesfor two options and the T-bill calculate price of a share of DRKC stock |
| c)- If the actual market price of DRKC stock is $ 60 demonstrate the arbitrage transaction you could create take advantage of the discrepancy Be |
| specific as to the positions you would need to take in each security and the dollard amount of your profit. |
Chapter 20 Problem 9 (a-d)
| Chapter 20 Problem 9 (a-d) | ||
| You are currently managing a stock portfolio worth $ 55 million and you are concerned that over the next four months equity values will be flat | ||
| and may even fall consequently you are considering two different strategies for hedging against possible stock declines: ( 1) buying ap protetive put | ||
| and (2) selling a covered call An over-the-counter derivaties dealer has expressed interes in your business and has quoted the following bid and offer prices (in millions ) | ||
| for at the money call and put options that expire in four months and match the characteristics of your portfolio: | ||
| Bid | Ask | |
| Call | $2.553 | $2.573 |
| Put | 1297 | 1.317 |
| a)- For each of the following expriation date vaues for the unhedged equity position, calcalte the terminal values (net of initial expense) for a protective put strategy. | ||
| 35,40,45,50,55,60,65,70,75 | ||
| b)- Draw a graph of the protective put net profit structure in part a, and demonstrate how his position could have been contructed by using call options and T-bills, | ||
| assuming a risk -free- rate of 7% | ||
| c)- For each of these same expiration date stock values calcualte the terminal net profit values for a covered call strategy | ||
| c)- Draw a graph of the covered call net profit structure in Part c and demonstrate how this postion could have been contructed by using options and T-bills again assuming a risk free rate of 7% |
Chapter 20 Problem 10 (a-d)
| Chapter 20 Problem 10 (a-d) | ||
| The common stock of Company XLT and its derivative securities currently trade in the market at the following prices and contract terms: | ||
| Price ($) | Exercise Price ($) | |
| Stock XLT | 21.5 | 21 |
| Call Option on Stock XLT | 5.5 | 21 |
| Put option on Stockt XLT | 4.5 | |
| Both of these options will expire 91 days from nw, and the annualized yield for the 91 -day treasury bill is 3.0 % | ||
| a)- Briefly explain how to contruct s synthetic Treasury bill in Part a using the martket price data provided | ||
| b)- Calculate the annualized yield for the synthetic treasure bill in Part a using the market price data provided | ||
| c)- Describe the arbitrage strategy implied by the difference in yidls for the actual and synthetic T-bill positions, Show the net, riskless cash flow you could generate assumung a transaction involving 21 actual T-bills and 100 synthetic T-bills | ||
| d)- |
