4G .. : Ims.yu.edu.sa 1. Suppose that a March call option on a stock with a strike price of $50 costs $2.50 and is held until March. Under what circumstances will the holder of the option make a gain? Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a long position in the option depends on the stock price at the maturity of the option 2. Suppose that a June put option on a stock with a strike price of S60 costs $4 and is held until June. Under what circumstances will the holder of the option make a gain? Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a short position in the option depends on the stock price at the maturity of the option. 3. An investor writes a December put option with a strike price of $30. The price of the option is $4. Under what circumstances does the investor make a gain? 4. Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option 5. Suppose that a European put option to sell a share for 560 costs $8 and is held until maturity. Under what circumstances will the seller of the option (the party with the short position) make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a short position in the option depends on the stock price at maturity of the option. 6. In March, a US investor instructs a broker to sell one July put option contract on a stock. The stock price is $42 and the strike price is $40. The option price is $3. Explain what the investor has agreed to. Under what circumstances will the trade prove to be profitable? What are the risks? 7. The current price of a stock is $94, and three-month call options with a strike price of S95 currently sell for $4.70. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an investment of S9,400. What advice would you give? How high does the stock price have to rise for the option strategy to be more profitable? & Suppose that put options on a stock with strike prices $33 and S40 cost $2 and SS, respectively. a. How can the options be used to create (a) a bull spread and (b) 4G I.. : Ims.yu.edu.sa AA STUURDU COSES SOURCE circumstances will the holder of the option make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option 5. Suppose that a European put option to sell a share for $60 costs $8 and is held until maturity. Under what circumstances will the seller of the option (the party with the short position) make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a short position in the option depends on the stock price at maturity of the option 6. In March, a US investor instructs a broker to sell one July put option contract on a stock. The stock price is $42 and the strike price is $40. The option price is $3. Explain what the investor has agreed to. Under what circumstances will the trade prove to be profitable? What are the risks? 7. The current price of a stock is $94, and three-month call options with a strike price of $95 currently sell for $4.70 An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an investment of S9,400. What advice would you give? How high does the stock price have to rise for the option strategy to be more profitable? 8. Suppose that put options on a stock with strike prices $33 and S40 cost $2 and 55, respectively. a. How can the options be used to create (a) a bull spread and (b) a bear spread? b. Is there a maximum profit or loss for each strategy? If so, what are they? c. What are the breakeven points? d. At what range of future stock prices will the spread make profit and loss. 9. A call with a strike price of $80 costs $8. A put with the same strike price and expiration date costs $3. For what range of stock prices would the straddle lead to a gain, loss, and breakeven
