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A stock price is $103 per share, exercise price of the options is $100 per share, all options are European and the stock does not pay any dividend. Option contracts are written on 100 shares of stock and mature in 6 months. The call price is $9 per share and the put price is $4 per share.

Use the put and call options and the underlying stock to create a portfolio which will let you borrow $10,000 (face amount) for 6 months through the financial markets.

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Lelia Lubowitz
Lelia LubowitzLv2
29 Sep 2019
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Problem 2

The writer of a regular exchange-listed put-option on a stock:

Has the right to buy 100 shares of the underlying stock at the market price.

Has the right to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the exercise price.

Has the obligation to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the market price.

please really need some help with these questions

Problem 3

Suppose an investor have a put option. What will happen if the stock price on the exercise date is below the exercise price?

A. The seller will need to deliver stock to the owner of the option. B. The seller will be obliged to buy stock from the owner of the option. C. The owner will not exercise his option.
D. The option will extend for nine more months.
E. None of the above options.

Problem 5

Suppose an investor sells one share of stock and buys a call option on the stock. What will be the value of her investment on the final exercise date if the stock price is above the exercise price? (Ignore transaction costs.)

A. The value of two shares of stock.
B. The value of one share of stock plus the exercise price. C. The exercise price.
D. The value of one share of stock minus the exercise price.

E. None of the above options.

Problem 9

All else equal, as the underlying stock price decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

Problem 10

All else equal, as the underlying stock volatility decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

1.Consider the following portfolio: You buy two July 2009 maturity call options on Dell with exercise price of 30. You also sell two July 2009 maturity put options on Dell with an exercise price of 40. The Call premium is $3.30 and the Put premium is $2.50.

Assume each option contract is for one share of stock.

e. What will be your profit/loss on this position if Dell is selling at $42 on the option maturity date?

f. What will be your profit/loss on this position if Dell is selling at $38 on the option maturity date?

g. At what stock price on the option maturity date will you just break even on your investment?

Make sure that you show or explain all calculations. Make sure you answer all questions above.

2- Consider an option on a non-dividend-paying stock when the stock price is $48, the strike price is $45, the risk-free interest rate is 6% per annum, the volatility is 20% per annum, and the time to maturity is five months. It can be shown that d1 = .7576 and d2 = .6285.

Create a delta neutral portfolio of call options and stock. Short 10,000 call options (100 contracts). How many shares would you buy or sell?

Make sure that you show or explain all calculations. Make sure that you state the number of shares. Make sure that you state whether you would buy or sell the shares

John Smith bought 300 shares at $40 per share about 10 months ago. The price has risen to $75 a share. At this time, the market is starting to weaken, but John feels there is more upside to the stock but is concerned with the weakening of the market. John would like to use put and call options. John can purchase three-month put options with a $75 strike price at a cost of $550 each (the put options are quoted at $5.50).

1. What benefits can John derive from using put options as a hedge tool? What are the costs and limitations of this strategy?

2. What is Johnรขย€ย™s profit if he buys at the indicated option price? What is John's profit if he does not enter into the put options and sells at $75 per share?

3. If John purchases the put options, what is the amount of profit if the put options move to $100 by the expiration date? What profit or loss does John face if the stock price declines to $50 per share?

4. Should John buy the put options? Why or why not? Are there market conditions that would lead him to purchase the put options?

5. Are there certain options trading strategies he can employ if the stock price declines?

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