The following option prices were observed for a stock for July 6 of a particular year. Use this information in problems. Ignore dividends on the stock. The stock is priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21. Assume that the options are European.

In problems, determine the profits for possible stock prices of 150, 155, 160, 165, 170, 175, and 180. Answer any other questions as requested. Your Excel spreadsheet Stratlyz8e.xls will be useful here for obtaining graphs as requested, but it does not allow you to calculate the profits for several user-specified asset prices. It permits you to specify one asset price and a maximum and minimum. Use Stratlyz8e.xls to produce the graph for the range of prices from 150 to 180 but determine the profits for the prices of 150, 160,…, 180 by hand for positions held to expiration. For positions closed prior to expiration, use the spreadsheet BSMbin8e.xls to determine the option price when the position is closed; then calculate the profit by hand.

Buy one October 165 put contract. Hold it until the options expire. Determine the profits and graph the results. Identify the breakeven stock price at expiration. What are the maximum possible gain and loss on this transaction?

Transcribed Image Text:

Calls Strike Jul Aug Oct Jul Aug Oct 2.70 5.25 8.10 2.40 4.75 6.75 5.75 7.50 9.00 165 170 0.80 3.25 6.00 Puts