Question

.1)John bought a 6-month Coke put option with an exercise price of $55 for a premium of $8.25 when John was selling for $48 per share. Each option is for 1 share. If at expiration Coke is selling for $42, what is John’s dollar gain or loss if you sell 100 shares?

2)

A hedge fund manager has a historical ROA of 7% and a ROE of 23%. The manager believes that a recession will cause the ROA to decline next year to 6%. Assuming an interest rate of 1%, what level of leverage should the manager employ in order to maintain an ROE of 23%?

3). Renee Harris has a portfolio that includes both traditional and alternative assets. She is interested in adding farmland to the portfolio. She has identified a 150-acre farm that is for sale for $10,000 per acre. Harris will put 40% equity in the deal and will finance the balance with a 6% bank loan. Harris is buying the land for investment purposes only and intends to lease the land to a local farmer. The farmer will annually pay Harris $1,250 per acre. Harris will pay combined property taxes and insurance of $60,000 per year. What is the cap rate?

Answer 1

1) John bought a 6-month Coke put option with an exercise price of $55 for a premium of $8.25 when John was selling for $48 per share. Each option is for 1 share. If at expiration Coke is selling for $42, what is John’s dollar gain or loss if you sell 100 shares?

X = $55

P = $8.25

S0 = $48

St = $42

Profit from selling 100 shares = (S0 - St) * 100 = (48 - 42) * 100 = $600

Profit from buying put option = max(X - St, 0) - Premium paid

Profit from buying put option = max(55 - 42, 0) - 8.25

Profit from buying put option = 13 - 8.25

Profit from buying put option = $4.25 per share or 4.25 * 100 = $425 per contract

Total profit = 600 + 425

Total profit = $1,025