Problems
Complete these problems on separate pages or paste in an email. You may use Excel (include formulas).
1. ABC stock is cu
ently trading at a market price (S) of $50. You do not own the stock, but you are long a put option on 1 share with a strike price (X) of $43. The cost put (premium) was $2.
A. The value of an option is composed of Intrinsic Value and Time Value. How you split the $2 premium up between these two components?
XXXXXXXXXXi. Time Value = _______ and ii. Intrinsic Value = _______
B. Using Excel or drawing by hand, create a payoff diagram for this put option using a range of $30 to $60 along the x-axis. Show on the graph where the 1) cu
ent price (S), 2) strike price (X) and 3)
eakeven point.
C. Compute the profit or loss of the strategy if the stock price at expiration is equal to:
1C1 $33: ____________
1C2 $43: ____________
1C3 $49: ____________
1C4 $53: ____________
1C5 $59: ____________
D. What is the strategy’s maximum gain? __________
E. What is the strategy’s maximum loss? __________
F. Looking back at the Game Stock situation, is the strategy described above more consistent with? 1) Wall Street Bets traders buying options; or 2) Hedge funds shorting the stock?
G. List 1 advantage does your strategy have over the co
esponding strategy (or) you associated it with (WSB buying options or hedge funds shorting the stock, whomever you selected)?
H. List 1 disadvantage does your strategy have over the co
esponding strategy (or) you associated it with (WSB buying options or hedge funds shorting the stock)?
2. XYZ stock is cu
ently trading at a market price (S) of $11.45. Unless otherwise specified, you do not own the stock. Using Excel or drawing by hand, create a payoff diagram for the following options positions using a range of +/- 50% of the cu
ent price (S) along the x-axis.
· Show 1) cu
ent price (S), 2) strike price (X) and 3)
eakeven point on the graph.
· Assume 1 option controls 100 shares.
· Indicate if the option is “in-,” “at-” or “out-of-” the money.
A. Long 1 Call Option with a strike price (X) of $9 for a $2.85 premium.
B. Long 1 Call Option with a strike price (X) of $13 for a $0.92 premium.
C. Short 1 Call Option with a strike price (X) of $9 for a $2.80 premium.
D. Short 1 Call Option with a strike price (X) of $20 for a $0.18 premium.
E. Long 1 Put Option with a strike price (X) of $13 for a $2.50 premium.
F. Short 1 Put Option with a strike price (X) of $15 for a $4.00 premium.
3. Suppose you enter into a 9-month forward contract to purchase a non-dividend paying stock when the stock price is $46 and the risk-free interest rate is 3% (continuous compounding). What is the theoretical forward price? (Remember to use “continuous compounding” to calculate your answer.)
4. What is the difference between the forward price and the value of a forward contract?
5. It is January 31st. The spot price of crude oil is $42 a ba
el and the September Crude Oil futures contract is trading at $45. Each futures contract covers 1,000 ba
els of Crude Oil. A futures speculator enters a long futures position with 1 contract of September Crude Oil futures. 3 months later, both the spot and futures prices have changed, and the trader decides to unwind her position early. Which answer below shows a co
ect profit/loss outcome? Show calculation.
a. Scenario #1: Crude Oil futures price rises to $50 and Spot price rises to $46. Profit = $5,000
. Scenario #1: Crude Oil futures price rises to $50 and Spot price rises to $46. Loss = $1,000
c. Scenario #2: Crude Oil futures price falls to $41 and Spot price falls to $39. Loss = $6,000
d. Scenario #2: Crude Oil futures price falls to $41 and Spot price falls to $39. Profit = $4,000
6. In March, the spot price of soybeans is $9.00 per bushel and the June Soybeans futures price is $9.60 per bushel. Each Soybeans futures contract represents 5,000 bushels. A soybeans a
itrageur is calculating the theoretical futures price and determining the best a
itrage strategy. The risk-free rate of interest annually is 4% and storage costs are 1% of the spot price annually. There is no convenience yield.
a. Calculate the theoretical forward price for this 3-month futures contract.
. If there is an a
itrage opportunity, what course of action should the trader take? Explain why.
c. Show steps as well as inflows, outflows and profit/loss.
7. A stock index cu
ently stands at $350. The risk-free rate of interest with continuous compounding is 8% and the dividend yield on the index is 4%. There are no storage costs. What should the price of a 4-month contract be?