Question

1. (4 pts) ABC is trading at $31.10.  Put options with a strike price of $30.00 and a June 2018 maturity are trading at $2.30.  
   1. The option would be: Circle ( In-the-money     At-the-money    or    Out-of the money)

2. What is the fundamental value of the option:

Fundamental Value = _________________

3. What is the time premium of the option:

Time premium = __________________

2. (4 pts) Assume you purchased a 3 month call option contract on a Stock BB with a strike price of $120 and a premium of $2.50.   The stock is currently trading at $116 and assume that at the end of 3 months, Stock BB is trading at $127.00:   

1. What is the profit or loss from your transaction:

profit or loss = $______________

2. Using a HPR, what is the rate of return over the 3 month period?

HPR over the 3 months = ______________%

Answer 1

Answer Out of money

AN out the money put option means the Strike price ($30) is less than the current market price of stock ($31.1).

Answer 2 Nil

Fundamental Value = For an out of money option, the fundamental or intrinsic value is always 0.

Answer 3 Time Premium = $ 2.30

Time premium = Option Premium - Fundamental Value = $ 2.30 - 0 =$ 2.30

Answer 4

Profit from the call otion = (Market Price at expiry - Striek Price) - Premium Paid = ($127 - $120 ) - 2.50 = $4.50

Using HPR Return = (Market Price at expiry - Market price at begining)

= $ 127 - $116 = $11   

HPR Return (%) = (Market Price at expiry - Market price at begining) / Market price at Begining * 100

= 11/116*100 = 9.48%