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13 Aug 2019

a. What is the difference between the two primary kinds of options (puts and calls)? What is the difference between European and American options?

b. What is the difference between payoff and profit of an option? Which line (payoff, profit) should be lower when you draw the two lines on graph for a long call option?

c. How do you form a protective put? What is your maximum profit when you sell a straddle?

d. Given a 3-month put price is 4.5 at strike price of 57.5 on an asset that is currently trading at 55.17. Assume risk free rate to be 7%. What is the price of a call option with strike price of 57.5 with 3 month maturity on the same asset? Show how you got the value. (Hint: You can use Put-Call parity to solve this)

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Keith Leannon
Keith LeannonLv2
13 Aug 2019

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Related questions

If you buy a call and sell a put option on the same underlying, at the same strike price, with the same option maturity, your possible payoff will look exactly like what other trading strategy? Explain. (Both options are European.)

The spot price of an asset is $2,500. The European call option on the asset with strike price $2,400 that expires in 6 months is traded at $225. The asset will pay a dividend in 3 months of $200. The default free 3-month pure discount bond is traded at $98 and the 6-month pure discount bond is traded at $95, both with face value $100. There is also a forward contract and a European put option on the asset with the same strike price as the call, both expiring in 6 months.

Answer the following:

(a) What should the forward price be and why?

(b) What should the price of the put option be?

(c) Describe the strategy you will follow and compute the profit of your strategy if the put option is traded at $205.

(d) Suppose that there are no 6-month pure discount bonds. How can you borrow synthetically over 6 months and at what interest rate if the put option is traded at $205?

(e) Plot the profit diagram and compute lhe break-even point(s) of the strategy that goes long the asset and goes short two call options on the asset.

(f) PIot the payoff diagram ofthe strategy that goes long one call and one put option on the asset. This strategy can be considered a speculation on what?

Q1. Put-call parity

Does put-call parity mean the put and the call option (of the same stock, with same expiration, with same strike price) have the same value/price?

If not, for put and call to have the same prices, what must be the relationship between the strike price and the current stock price?

Hint: Find the Apple option page from Yahoo Finance and look for the strike price where the call and put price are similar.

Q2.A European call option and a European put option on a stock both have the same strike price of $45 and expire in 6 months. Currently, the market call price is $10 and the put price is $6. The risk-free rate is 2% per annum, and the current stock price is $49. Identify the arbitrage opportunity open to the trader. All the interest rates are with continuous compounding.

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