Question

The price of a stock is $40. The price of a one-year European put option on the stock with a strike price of $30 is quoted as $7 and the price of a one-year European call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options.

a) Construct a payoff and profit/loss table

b) Draw a diagram illustrating how the investor’s payoff and profit or loss at expiation.

Answer 1

In the Quetion Actual Price of Stock after one year is not given. Assuming Actual Price of Stock after one year is $ 45.

(if you have the actual price you can change figures accordingly)

Particulars	Inflow	Outflow	Pay off	Premium	Profit/-loss
Buy 100 Shares	$4500	$4000	$500	$0	$500
Short 100 Call	$0	$0	$0	$500	$500
Buy 100 Put	$0	$0	$0	-$700	-$700
				Net Profit	$300

Note: at price of $45 call option and put option are out of money. Therefore buyer of options will not excercise options.

b) Diagram illustrating how the investor’s payoff and profit or loss at expiation.