Question 1 a.Construct a table of the investors profit (loss)

| June 14, 2016

Question
Question 1

a.Construct a table of the investors profit (loss) given the following stock prices at
expiration: $10, 15, 20, 25, 30, 35, 40, 45, 50.

purchase
exercise

$2.00
$30.00

$45.00
$13.00

$50.00
$18.00

$45.00
$(2.00)

$50.00
$(2.00)

Answer
Stock Price
profit or Loss

$10.00
$(2.00)

$15.00
$(2.00)

$20.00
$(2.00)

$25.00
$(2.00)

$30.00
$(2.00)

$35.00
$3.00

$40.00
$8.00

b. Now construct a table assuming the option had been a put option instead of a call
option.

Answer
Stock Price
profit or Loss

$10.00
$18.00

$15.00
$13.00

$20.00
$8.00

$25.00
$3.00

$30.00
$(2.00)

$35.00
$(2.00)

$40.00
$(2.00)

c. Graph the profit/loss schedules in parts (a) and (b). Indicate at what stock
prices the investor would breakeven with both the call and put options.

Answer

Breackeven-Call&Put Opt ions

Row 6

Row 12

d. If the investor had purchased both the call and the put, what type of strategy would they
be using?

Answer
The type of strategy when investor purchasing a combination of a call and a put, each with
the same exercise price and expiration date called " Straddle"

2.

An investor owns a share of 3M (originally purchased at $55) and writes a call option
on the same stock and sells it for $3.00 with an exercise price of $55.

a. In what type of strategy has the investor engaged?

Answer
This strategy is known as "Covered Call", when investor write a call on an
asset together with buying the asset.
b.Construct a table showing the profit (loss) to the investor assuming the following stock
prices when the call option expires: $30, 35, 40, 45, 50, 55, 60, 65, 70. (Note you must
consider both the profit (loss) on the 3M stock and the option.)

exercise
selling cost

$55.00
$3.00

Answer
Stock Price
profit

$30.00
$(22.00)

$35.00
$(17.00)

$40.00
$(12.00)

$45.00
$(7.00)

$50.00
$(2.00)

$55.00
$3.00

$60.00
$3.00

$65.00
$3.00

$70.00
$3.00

c. Now assume instead of writing a call option, the investor bought a put option at th+A47e
same price. What type of strategy is this?

Answer
Protective Put strategy that aim to guarantee minimum proceeds equal to the put’s
exercise price.

d. Given (c) above, construct a table showing the investors profit (loss) assuming the
following stock prices when the put option expires: $30, 35, 40, 45, 50, 55, 60, 65, 70.
(Note you must consider both the profit (loss) on the 3M stock and the option.)

exercise
selling cost

$55.00
$3.00

Answer
Stock Price
profit

$30.00
$(3.00)

$35.00
$(3.00)

$40.00
$(3.00)

$45.00
$(3.00)

$50.00
$(3.00)

$55.00
$(3.00)

$60.00
$2.00

$65.00
$7.00

$70.00
$12.00

3. You currently own both a call option and a put option on the same stock. Explain what will
happen to the prices (values) of both options given the following changes, and justify your
reasons. Consider each change as independent of the other changes.
a.

The price of the underlying stock decreases.

Answer
when the underlying stock decrease, the call option should decrease in
value as well because the payoff to call will decease; conversely, the put
option would increase.
b.
The time to maturity of the option nears.

Answer
short time to maturity would result in decrease the values of call and put
options because there is shorter time for future event to affect prices, and
the range of likely stock prices decrease.
c.
The underlying stock becomes more volatile.

Answer
The call and put options values would increase when there is more volatile
of the underlying stock due to higher predicted prices fluctuation.
d.

The underlying stock increases its dividends.

Answer
a higher the dividends must lower expected rate of capital gain, which
would result of lowering the call option; while the Put option will increase.

4. On March 1, 2005, a trader went long on wheat at $3.00/bushel (5,000 bushel contract). The position remained open until March 7th. The trader was
required to post an initial margin of $3,000, and must maintain a margin of $2,000. Fill in the missing values in the table below, given the daily settlement
prices.

Answer

Price
amount
post intial matgin
maintain a margin

Date
Settlement Price
1-Mar
$15,000.00
2-Mar
$15,150.00
3-Mar
$15,300.00
4-Mar
$14,400.00
5-Mar
$13,900.00
6-Mar
$15,000.00
7-Mar
$15,400.00

$3.00
5,000.00 contract price
$3,000.00
$2,000.00

Daily Mark to Market
Beginning Margin Balance Deposit (Withdrawal) Ending Margin Balance
$$3,000.00
$$3,000.00
$150.000
$3,150.00
$(150.00)
$3,000.00
$150.000
$3,150.00
$(150.00)
$3,150.00
$(900.000)
$2,250.00
$750.00
$2,100.00
$(500.000)
$1,600.00
$1,400.00
$2,500.00
$1,100.000
$3,600.00
$(600.00)
$4,100.00
$400.000
$4,500.00
$(1,500.00)
$3,400.00
$400.000

What is the traders profit (loss) when the position closes on March 7?
$400.00

Answer

$15,000.00

5.
Suppose the spot price for oil is $40.00/barrel. The cost of carry for one year is 8%, and is an accurate
estimate of what the price of oil would be in one year. If a trader can take a long position in a futures contract (1,000
barrels) for delivery of oil at $41.00 in one year, and the transaction cost is $.15/barrel, is the long position profitable
for the trader? What would be the profit (loss)?

Answer
spot price (current)
cost / Year
future contract(barrels)
price of future contract
Transation cost per barrel

$40.00
8%
1,000.00
$41.00
$0.15

spot price future
43350
41000
2350

Yest it would be profit for the trade because spot price bigger than future contract.
profit

2350

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