Question

1) What is the payoff to a short forward position if the forward price is $40...

1) What is the payoff to a short forward position if the forward price is $40 and the underlying stock price at expiration is $60? What would be the payoff to a purchased put option with a strike price of $40 on the same underlying stock expiring at the same time?

Selected Answer $-17.30 (wrong)

a) $-14.50

b) $17.30

c) $-17.30

d) $2.80

e) $14.50

2) Suppose the effective annual interest rate is 10%. Consider a 1-year call option on a stock with an exercise price of $45 and an option premium of $8.23. What profit does the owner of this call earn if the underlying stock is worth $52 when the option is exercised?

a) $16.05

b) $-1.23

c) $-2.05

d) $2.08

e) $7.00

3) Suppose the effective annual interest rate is 10%. Consider a 1-year put option on a stock with an exercise price of $80 and an option premium of $15.66. What profit does the owner of this put earn if the underlying stock is worth $54 when the option is exercised?

a) $26.00

b) $10.34

c) $43.23

d) $8.77

e) $10.77

4) What is the payoff to a short forward position if the forward price is $40 and the underlying stock price at expiration is $60? What would be the payoff to a purchased put option with a strike price of $40 on the same underlying stock expiring at the same time?

a) short forward payoff = $–20; put payoff = $0

b) short forward payoff = $0; put payoff = $0

c) short forward payoff = $0; put payoff = $–20

d) short forward payoff = $0; put payoff = $20

e) short forward payoff = $–20; put payoff = $–20

5) Which of the following contracts should be more expensive?

a) A long put option on Stock I with a strike price of $60

b) A short forward contract on Stock I with a forward price of $60

c) Both the call and the forward should be equally valuable.

Homework Answers

Answer #1

1)Solved in 4th part

2.EP = $45

Option Premium = $8.23

Interest lost on premium = 8.23*10% = $0.823

Profit on Expiry = 52 – 45- 8.23 – 0.823

-$2.05 i.e. c

3. Put Option

EP = $80

Option Premium = $15.66

Interest lost on premium = 15.66*10% = $1.566

Profit on Expiry = 80-54-15.66-1.566

= $8.77 i.e. d

4.Short forward position payoff

Sell @ $40

Buy @ $ 60

Payoff = -$20

Put Option – Right to Sell

Since price at expiration is $60 i.e more than Exercise price, put option holder will not exercise.

Payoff = $0

Hence, a

5.Both contracts will enable the user to sell the share @$60

But under put option, premium will be paid which is not required to be paid under the forward contract. Hence, put will be more expensive

Hence, a

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
Similar Questions
Identify each statement as being either TRUE or FALSE (1 point each). If you are short...
Identify each statement as being either TRUE or FALSE (1 point each). If you are short a put option that is exercised, and you are assigned, then you are required to sell the stock at the strike price. An American option can be exercised only at the expiration date. A call option gives the owner the right to purchase a fixed number of shares at a specified price, but no right to receive dividends paid during the life of the...
You buy a put option with strike price of $40 and simultaneously buy two call options...
You buy a put option with strike price of $40 and simultaneously buy two call options with the same strike price, $40. Currently, the market value of the underlying asset is $39. The put option premium is $2.50 and a call option sells for $3.25. Assume that the contract is for 1 unit of the underlying asset. Assume the interest rate is 0%. Draw a diagram depicting the net payoff (profit diagram) of your position at expiration as a function...
1. You buy a put option with strike price of $25. Currently, the market value of...
1. You buy a put option with strike price of $25. Currently, the market value of the underlying asset is $30. The put option premium is $3.25. Assume that the contract is for 150 units of the underlying asset. Assume the interest rate is 0%. a. What is the intrinsic value of the put option? b. What is the time value of the put option? c. What is your net cash flow if the market value of the options’ underlying...
1. A put option has strike price $75 and 3 months to expiration. The underlying stock...
1. A put option has strike price $75 and 3 months to expiration. The underlying stock price is currently $71. The option premium is $10. "What is the time value of the put option? Would this just be 0? Or: 71-75=-4 then 10-(-4)= 14? 2. The spot price of the market index is $900. After 3 months, the market index is priced at $920. An investor had a long call option on the index at a strike price of $930...
1, You short a put with strike K. The underlying price at expiration is S. What's...
1, You short a put with strike K. The underlying price at expiration is S. What's your payoff? a, S - K if K > S and zero otherwise b, 0 c, K - S d, S - K 2, What's the payoff at maturity to a long call with strike K and underlying asset price S? a, max(S-K,0) b, min(S-K,0) c, max(K-S,0) d, min(K-S,0) 3, What's the payoff at maturity to a long put with strike K and underlying...
2) Discuss how a long call position in a particular stock would differ from a short...
2) Discuss how a long call position in a particular stock would differ from a short put position in the same stock with the same strike price and the same expiration date. 2a) Explain why a call option on a specific stock with a specific strike price and expiration date might be worth much more than another call option on a different stock having the same stock price, the same option strike price, and the same expiration date.
You buy a call option and buy a put option on bond X. The strike price...
You buy a call option and buy a put option on bond X. The strike price of the call option is $90 and the strike price of the put option is $105. The call option premium is $5 and the put option premium is $2. Both options can be exercised only on their expiration date, which happens to be the same for the call and the put. If the price of bond X is $100 on the expiration date, your...
A strap option strategy is created by purchasing two call options and one put option of...
A strap option strategy is created by purchasing two call options and one put option of the same underlying stock. The options have the same exercise price (E=50) and same expiration date. a) What is the payoff of the strategy is the stock price is $0? c) What is the payoff of the strategy is the stock price is $100?
a.    As the stock’s price decreases, a call option on the stock ___________ in value. b.   ...
a.    As the stock’s price decreases, a call option on the stock ___________ in value. b.    As the stock’s price decreases, a put option on the stock ___________ in value. c.     Given two put options on the same stock with the same time to expiration, the put with the lesser strike price will cost ________ than the put option with the lower strike price. d.    Given two call options on the same stock with the same time to expiration, the...
The current price of Stock A is $305/share. You believe that the price will change in...
The current price of Stock A is $305/share. You believe that the price will change in the near future, but your are not sure in which direction. To make a profit from the price change, you purchase ONE call option contract (each contract has 100 calls) and TWO put option contracts (each contract has 100 puts) at the same time. The call option and the put option have the same expiration date. The strike price of the call option is...