Question
A and B enter into two contracts with each other at the same time. Neither A nor B owns any shares of IBM at the
A and B enter into two contracts with each other at the same time. Neither A nor B owns any shares of IBM at the time they enter into the contracts. If, at any time under the contracts, B sells shares of IBM to A, B will acquire the shares in the marketplace and pay the market price at that time. If A acquires shares from B under the contracts, A will immediately sell the shares for their market price at that time. The two contracts are as follows: Contract 1: A has the right but not the obligation to buy 100 shares of IBM from B for $100 per share at any time between the date the contract was entered into and July 17, 2020. If A exercises this right, B must sell A the shares. Contract 2: B has the right but not the obligation to sell 100 shares of IBM to A for $100 per share at any time between the date the contract is entered into and July 17, 2020. If B exercises this right, A must buy the shares. Assume that both A and B wait until July 17 before they take any action under either contract. What happens to A and B if IBM is selling for $115 per share on July 17, 2020? What happens if it is selling at $80 per share? Your answer should include the amounts of money that A and B either made or lost on the transaction. Assume that A paid B $200 to enter into these contracts.
Rephrase the agreements between A and B in question 3 by using call and put options.
What event will always occur on July 17 between A and B as long as IBM is not trading at $100 per share? Why?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started