Question

For each of the derivative instruments from a Forward contract, Call option, Put Option, give a formula for the payoff from the long side of the contracts. Then draw the associated payoff diagrams. The x-axis should be the ending stock price and the y-axis should be the payoff.

Answer #1

Forward contract

The value of a forward position at maturity is the difference between the delivery price K and the underlying price ST at the time of maturity.

For a long position, the payoff is ST - K , and it benefit from a higher underlying price.

Long Call Option

Payoff = Max [0,stock price (ST) - strike price (k) ]

Profit = Max [0,stock price (ST) - strike price (k) ] - premium (C0)

Long Put Option

Payoff = Max [0,strike price (k) - stock price (ST) ]

Profit = Max [0,strike price (K) - stovk price (ST) ] - premium (P0)

1) What is the payoff to a short forward position if the forward
price is $40 and the underlying stock price at expiration is $60?
What would be the payoff to a purchased put option with a strike
price of $40 on the same underlying stock expiring at the same
time?
Selected Answer $-17.30 (wrong)
a) $-14.50
b) $17.30
c) $-17.30
d) $2.80
e) $14.50
2) Suppose the effective annual interest rate is 10%. Consider a
1-year call option on...

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premium of $2, a Put option on the asset with a strike price of $45
is trading in the market at a premium of $8, and a forward contract
on the asset is trading at a price of $52. All derivatives
contracts are on 1 unit of the asset and all...

You buy a call option and buy a put option on bond X. The strike
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expiration date, which happens to be the same for the call and the
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If the price of bond X is $100 on the expiration date, your...

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contract.)

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axis). Show the calculations of key points.

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Buy the call option, sell the stock, and sell a bond that pays
the option’s exercise price at maturity
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exercise price at maturity
Sell the call, buy the stock, and sell a bond that pays the
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Solve in following 4 steps.
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