Question

The price of a stock is $40. The price of a one-year European put option on...

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.

Homework Answers

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.

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