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Question 1 Khalid is a hedge fund investor at Puma Asset Management Company. He purchased stock...

Question 1

Khalid is a hedge fund investor at Puma Asset Management Company. He purchased stock index fund, currently selling at SR1, 200 per share. To protect against losses, Khalid pay put option premium for SR200 with exercise price of SR1, 200 and 3-month time to expiration. Ali is Khalid financial advisor point out that Khalid spends too much on the put options. He told Khalid to buy call options with strike price SR1, 200 and premium at 200 with same expiration date. Ali will go with call option strategy.

a.         Analyze by fill in the following table for Khalid’s and Ali’s strategies if the stock index price reached SR800, SR1, 000, SR1,200, SR1400, SR1500.                                                                                                                                   

Khalid’s strategy – put option

Stock price ($)/market value

800

1000

1200

1400

1500

Exercise price

Option value

premium

Profit

Ali’s strategy – Call option

Stock price ($)/market value

800

1000

1200

1400

1500

Exercise price

Option value

premium

Profit
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Answer #1

Khalid’s strategy – Put option

Market Value SR 800 SR 1,000 SR 1,200 SR 1,400 SR 1,500

Exercise price

SR 1,200

 SR 1,200 SR 1,200 SR 1,200 SR 1,200

Option value

SR 400

SR 200

SR 0

SR 0

SR 0

Premium paid

SR 200

SR 200

SR 200

SR 200

SR 200

Profit/Loss

 SR 200 SR 0 -SR 200 -SR 200 -SR 200

Ali’s strategy – Call option

Market Value SR 800 SR 1,000 SR 1,200 SR 1,400 SR 1,500

Exercise price

SR 1,200

 SR 1,200 SR 1,200 SR 1,200 SR 1,200

Option value

SR 0

SR 0

SR 0

SR 200

SR 300

Premium paid

SR 200

SR 200

SR 200

SR 200

SR 200

Profit/Loss

 -SR 200 -SR 200 -SR 200 SR 0 SR 100
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