Question

# Consider a portfolio consisting of a long position in one stock and a short position in...

Consider a portfolio consisting of a long position in one stock and a short position in two call options. Both the current stock price (S0) and the exercise price (K) of call options are \$20. The call option costs \$3. a) Construct a table showing the payoffs and net profits for all possible price ranges. b) Draw a diagram showing the variation of an investor’s net profit with the terminal stock price c) For what price range does this portfolio provide a net positive return? d) What is the maximum amount of profit that can be obtained?

#### Homework Answers

Answer #1

a) Table showing Payoff nad net profit/loss

 Price as at expiry Profit/Loss on holding Share @ \$20 Loss on two shorted call option Strike price = 20\$ Payoff Premium Received Net Profit/loss 10 -10 -10 6 -4 11 -9 -9 6 -3 12 -8 -8 6 -2 13 -7 -7 6 -1 14 -6 -6 6 0 15 -5 -5 6 1 16 -4 -4 6 2 17 -3 -3 6 3 18 -2 -2 6 4 19 -1 -1 6 5 20 0 0 0 6 6 21 1 -2 -1 6 5 22 2 -4 -2 6 4 23 3 -6 -3 6 3 24 4 -8 -4 6 2 25 5 -10 -5 6 1 26 6 -12 -6 6 0 27 7 -14 -7 6 -1 28 8 -16 -8 6 -2 29 9 -18 -9 6 -3 30 10 -20 -10 6 -4

b) Diagram

c) From price 15\$ and 25\$ this portfolio will provide a net positive return

d) Maximum amount of profit that can be obtained = \$6

Know the answer?
Your Answer:

#### Post as a guest

Your Name:

What's your source?

#### Earn Coins

Coins can be redeemed for fabulous gifts.

##### Not the answer you're looking for?
Ask your own homework help question
ADVERTISEMENT
##### Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

ADVERTISEMENT