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?

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.

1)Solved in 4th part

2.EP = \$45

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

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

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

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