Solution
Robert answered on
Dec 27 2021
Answers:1
Payoff Diagram
-40000
-20000
0
20000
40000
60000
5
0
5
0
.4
5
0
.8
5
1
.2
5
1
.6 5
2
5
2
.4
5
2
.8
5
3
.2
5
3
.6 5
4
5
4
.4
5
4
.8
5
5
.2
5
5
.6 5
6
5
6
.4
5
6
.8
5
7
.2
5
7
.6 5
8
A
xi
s
Ti
tl
e
Payoff of Scenario#1
BE
(20,000)
(10,000)
-
10,000
20,000
30,000
40,000
5
0
5
0
.4
5
0
.8
5
1
.2
5
1
.6 5
2
5
2
.4
5
2
.8
5
3
.2
5
3
.6 5
4
5
4
.4
5
4
.8
5
5
.2
5
5
.6 5
6
5
6
.4
5
6
.8
5
7
.2
5
7
.6 5
8
A
xi
s
Ti
tl
e
Payoff of Scenario #2
BE
(15,000)
(10,000)
(5,000)
-
5,000
10,000
15,000
20,000
5
0
5
0
.4
5
0
.8
5
1
.2
5
1
.6 5
2
5
2
.4
5
2
.8
5
3
.2
5
3
.6 5
4
5
4
.4
5
4
.8
5
5
.2
5
5
.6 5
6
5
6
.4
5
6
.8
5
7
.2
5
7
.6 5
8A
xi
s
Ti
tl
e
Payoff of Scenario #3
a)
Specifications of the Oil Contract:
Contract Unit: 1,000 Ba
el
Minimum Price Fluctuation: $ 0.01 per Ba
el
Certain Level Defined = $ 50 per Ba
el
Point A = $ 55 per ba
el
Strike Price of Put = $ 55
Price at Expiry = $ 50
Cost of per Put = $ 1,700
Total cost of purchase of 10 contracts = $ 1700 X 10 = $ 17,000
Gross Income from exercise of put option = ($ 55 - $ 50) X 10 X 1000 = $ 50,000
Net Profit = $ 50,000 - $ 17,000 = $ 33,000
The amount is same as indicated by the graph.
)
If we had wrote 10 call option of Strike price $ 50 instead of call option of Strike price $ 55
when the price of oil was at $ 55, we would have made lesser profit because the premium we
eceived by selling At the money call option would be higher than Out of Money call option. At
expiry both the options are worthless and we would end up with the premium we received.
c)
If we had wrote 10 call option of Strike price $ 50 instead of buying put option of Strike price
$ 55 when the price of oil was at $ 55, we would have made lesser profit because the premium
we received by selling OTM call option is much lesser than the profit earned by exercising put
option at expiry when the Oil price is at $ 50.
d)
Margin requirement for Oil future = $ 2,650
Value of Future Contract in Scenario #1 = $ 55 * 1000 = $ 55,000
So, the Leverage Ratio = ($ 55,000/ $ 2,650) = 20.76 times
e) Leverage ratio indicates...