Question

You purchase 100 put options on a stock with exercise price of $52 at a premium of $4.30 per put. You also purchase 100 call options on the same stock with exercise price of $54 and call premium of $5.10 per call. If at expiration of the options (the options expire on the same date), the stock's price is $52.79, calculate your profit.

According to put-call parity, the present value of the exercise price is equal to the:

	A.	Stock price minus the put premium minus the call premium.
	B.	Stock price plus the call premium minus the put premium.
	C.	Stock price plus the put premium minus the call premium.
	D.	Put premium plus the call premium minus the stock price.

The seller of a European call option has the:

	A.	right, but not the obligation, to buy a stock at a specified price on a specified date.
	B.	obligation to buy a stock at the lower of the exercise price and the market price at the expiration date.
	C.	obligation to sell a stock on a specified date at a specified price.
	D.	obligation to buy a stock on a specified date at a specified price.

Travel Express has a debt-to-equity ratio of .65. The pretax cost of debt is 8 percent while the unlevered cost of capital is 14 percent. What is the cost of equity if the tax rate is 21 percent?

	A.	19.1 percent
	B.	15.8 percent
	C.	18.7 percent
	D.	17.1 percent

Answer 1

1) Total premium paid = (100*4.3)+(100*5.1)

=430+510 = 940$

If price at expiry is 52.79$ , then none of the oprtion would be exercised, Thus total loss = premium paid = 940$

2) According call put parity

C+PV(x) = P + S

C= Call price

PV(x) = PV of strike price

P = put price

S= stock price

Thus

PV(x) = P+S-C

Thus ans

C) Stock price plus the put premium minus the call premium

3) Writer of call has an obligation to sell stock if holder of option exercises it. Now call option will exercise only when stock price is more than exercise price. Thus ans

c) obligation to sell a stock on a specified date at a specified price.

4) Re = 0.14 + [(0.14-0.08)*0.65*(1-0.21)]

=0.14+[0.06*0.65*0.79]

=0.14+0.031

=17.1%

Ans D) 17.1%