Question

Suppose a financial manager buys call options on 25,000 barrels of oil with an exercise price of $98 per barrel. She simultaneously sells a put option on 25,000 barrels of oil with the same exercise price of $98 per barrel. What are her payoffs per barrel if oil prices are $81, $93, $98, $115, and $103? (Leave no cells blank - be certain to enter "0" wherever required. A negative answer should be indicated by a minus sign.)

Answer 1

If the oil price is $81,

Then the pay off is -$17,($98 - $81), the call option will not be exercised, the put option holder has to be compensated.

When the price is $93,

the pay off -$5, the call option will not be exercised, the put option holder has to be compensated.

When the oil price is $98, None of the options will be exercised, as the exercise price = oil price

the pay-off is zero.

When the oil price is $115, the call option will be exercised.

the pay off is $17

When the oil price is $103, the call option will be exercised.

the pay off is $5.