FIN 401 Chapter Notes - Chapter 25: Underwriting, Call Option, Montreal Exchange

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24 Mar 2016

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*omit 25. 3, 25. 5, a simple model: part i in 25. 2, and managerial opions in 25. 9* Opion: a contract that gives its owner the right to buy or sell some asset at a ixed price on or before a given date. Exercising the opion: the act of buying or selling the underlying asset via the opion contract. Striking/exercising price: the ixed price in the opion contract at which the holder can buy or sell the underlying asset. Expiraion date: the last day on which an opion can be exercised. American opions: an opion that can be exercised at any ime unil its expiraion date. European opions: an opion that can be exercised only on the expiraion date. Call opion: the right to buy an asset at a ixed price during a paricular period of ime. Put opion: the right to sell an asset at a ixed price during a paricular period of ime.

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McDonald Super is an arbitrageur who looks for arbitrage opportunities in the stock options market. Option-102 is a European put option with a strike price of $50 while its underlying stock (non-dividend paying) has a current price of $37. Option-103 is a European call option with a strike price $18 while the underlying stock (non-dividend paying) has a current price of $20. The market interest rate is fixed at 10% per annum (Time period is 2 years). Based on this situation, please explain whether Mr. Super can make arbitrage gain with both options and how that can be done (given that the price of Option-102 costs $3 while that of Option-103B costs $5).

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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

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.

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FIN 401 Chapter Notes - Chapter 25: Underwriting, Call Option, Montreal Exchange

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