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The price of Stock ABC is currently $70. A put option on 100 shares of Stock ABC has an exercise price of $75 and this option currently sells for a premium of $9.50.

A. What is the intrinsic value and the time value of the option today?

B. What is the break-even future stock price associated with the options? (Show calculation)

C. If the stock price on the expiration date is $78, what is the net profit on this transaction to the person who wrote the option? The person who bought the option?

D. If the stock price on the expiration date is $71, what is the net profit on this transaction to the person who wrote the option? The person who bought the option?

E. If the stock price on the expiration date is $41, what is the net profit on this transaction to the person who wrote the option? The person who bought the option?

F. What is the maximum possible net profit for the person who purchased the option? What is the maximum possible net loss to the person who wrote the option?

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Namita kumari
Namita kumariLv6
28 Sep 2019

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Related questions

Consider options on Microsoft stock. Suppose that there are call options with a strike price of $10 and put options with a strike price of $10, both with the expiration date of January 16th. Suppose that there is a 50% chance that the stock price will be $13 on January 16th (Scenario A) and another 50% chance that it will be $9 on January 16th (Scenario B). Answer the following:

A) Compute the gross profit (i.e. disregarding option premium) of the call option and of the put option on January 16th under scenario A

B) Do the same for scenario B

C) Now consider the following portfolio: buying one share of the stock and buying a put option Compute the value of the portfolio on January 16th under each scenario

D) How much would you be willing to pay for the call option now? For the put option? It is understood that there isn't enough info to get exact numbers but use approximate numbers showing how you came up with the numbers.

Question 1

During a crisis such as Hurricane Katrina, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?

$30

$35

$40

Indeterminant with the given information.

2 points

Question 2

Which of the following is an example of a price floor?

A sale price with a limit on the quantity you can purchase.

Rent-controlled apartments

Predatory pricing designed to put a competitor out of business.

The minimum wage

2 points

Question 3

Airline regulation of the 1970s produced a similar result to which of the following government interventions?

The Affordable Care Act

Minimum wage laws

Rent control laws

Communism

2 points

Question 4

Which of the following is a possible effect of a price ceiling?

A surplus of the good.

Increases in product quality.

Increased gains from trade.

People will waste time in lines waiting to purchase the good.

2 points

Question 5

What is a price ceiling?

A minimum price consumers are willing to pay.

A minimum price allowed by law.

A maximum price allowed by law.

A maximum price consumers are willing to pay.

2 points

Question 6

Why are the long lines generated by a shortage worse than paying a higher price in money?

It is not better or worse. Paying in time and paying in money are essentially the same in a market economy.

Paying with time reduces the value of money, and prevents valuable trades from occurring.

Waiting in line is a waste of a valuable resource: time. Paying a price in money transfers the value of resources from one person to another, and maximizes the value of resources.

Paying with time gives those who do not work an advantage over those who do.

2 points

Question 7

Which of the following is a possible effect of a price floor?

The quantity supplied exceeds the quantity demanded.

Increased gains from trade.

Decreases in product quality.

A shortage of the good.

You're the resident economic expert of Medicine. The CEO, Jeff, is asking you to complete a project that another person, Shawn, had started working on before he retired. The project is time-sensitive. Jeff explains that Medaline has a manufacturing plant that produces a prescription topical cream called DermaPlus, which is used for treating certain skin conditions. Hospitals and pharmacies are the main buyers of DermaPlus. The market for this cream is extremely competitive. Several other firms produce creams that are almost identical to DermaPlus. Medaline's current share of the market for this type of topical cream is so small that it cannot influence the market price. On the other hand, because Medaline is relatively small compared to the size of the market, it can sell as much of the cream as it likes at the prevailing market price. The plant producing DermaPlus has been operating for a little over three years with the same manufacturing equipment. Currently, there are no plans for upgrading or adding to this equipment. Over the last three years, the price of DermaPlus and related creams has been quite volatile and Medaline has tried to react to the changing price by varying its output level to constantly maximize its monthly profit. To date, Medaline has been able to vary monthly production quite easily by taking advantage of a flexible, none union workforce with a large number of part-time workers. However, the workforce at the DermaPlus plant is just about to be unionized. Once that happens, it will become much more difficult to vary the amount of labour used in the short run and therefore much more difficult to vary the monthly production of DermaPlus. Before he left, Shawn had been asked to estimate the short-run cost functions for the DermaPlus manufacturing plant. The goal was to use this information to determine the profit-maximizing output level and use that information to estimate the optimal size for the newly unionized workforce. Jeff tells you that DermaPlus and related products are just about to come under the umbrella of a new reference-based pricing scheme. Under the new scheme, the government will set the price of DermaPlus and competing creams and review that price every two years. Once the price has been set Medaline and other manufacturers simply have to decide how much of the cream, if any, they want to produce and sell. Unfortunately, although the workforce will be unionized in just over a week, the referenced based price for DermaPlus will not be announced for another two months. Consequently, Medaline has to choose the size of its workforce (and therefore its production capacity) before it knows the price it will get for its product. To reduce the uncertainty about this decision, Jeff recently hired a consultant with expertise in the pharmaceutical industry and reference-based pricing to estimate the price that will be announced for DermaPlus. The consultant estimates that there is a 6% chance that the price will be $50 per unit, a 19% chance that the price will be $100 per unit and a 75% chance that the price will be $150 per unit. This is the best estimate the consultant can provide given the lack of information coming from the government about the issue. After giving you this background information, Jeff asks you to complete the following tasks:

1. Determine the profit-maximizing average monthly production capacity for DermaPlus for each of the possible reference-based prices identified by the consultant. Estimate the expected monthly profit in each case.

2. Recommend an average monthly production capacity for the next 12 months given the uncertainty about the price of DermaPlus. Your recommendation will be used to set the size of the manufacturing plant's unionized workforce. (Note: You simply have to determine the best monthly production capacity for the next 12 months, not the number of workers required.)

3. Write a short report summarizing the results of your analysis and any recommendations. Jeff makes it clear to you that he is a risk-neutral person. You only have a week to complete the analysis, interpret the results, and summarize your findings and recommendations in a brief report. When Jeff makes his recommendations about the structure and format of the report you realize that they are much the same for Assignment 1 that you completed at another company. Finally, Jeff gives you a copy of one of Shawn's spreadsheets. This one contains data that Shawn collected on the variables he thought would be needed to estimate the short-run cost functions for DermaPlus and the firm's profit-maximizing output level. Jeff makes it clear that he has complete confidence in Shawn's technical abilities and professional judgment and tells you to take the information in Shawn's spreadsheet at face value and to use it as a starting point for your analysis.

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