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Consider a stock that is currently priced at $140. The price of a Europeon put option that expires in 1 year has a strike price
Consider a stock that is currently priced at $140. The price of a Europeon put option that expires in 1 year has a strike price of $130 and is quoted as $17. The price of a 1 year Europeon call option has a strike price of $150 and is quoted as $15
a) Suppose that an investor buys 200 shares, short 200 call options and buys 200 put options. Show that how the profits or loss of the investor varies with the change in stock price over the next year. (3 marks)
b) How does your answer change if the investor buys 200 shares, shorts 400 call options and buy 400 put option? (3 marks)
c) Is it possible that one can find such a Europeon put option that expires in 1 year with a strike price of $150 and is quoted as $15 along with a 1 year Europeon call option having a strike price of $130 and is quoted as $17. If yes, do you think that the profit or loss positions of the investor can be examined. Please plot a graph to support your view point. (3 marks)
d) Do you think that the put-call parity always holds? Elaborate your answer by considering either of the two scenarios presented. Plot the graph if necessary. (3 marks)
e) What in your opinion a fund manager should do if he/she is looking to mitigate the risk and still earn a good profit? Will you answer change if the investor wants to speculate in the stock market? (3 marks)
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