Question
#Homework 14. The current price of a non-dividend paying stock is 40 and the continuously compounded risk-free interest rate is 8%. You are given that
#Homework
14. The current price of a non-dividend paying stock is 40 and the continuously compounded risk-free interest rate is 8%. You are given that the price of a 35-strike call option is 3.35 higher than the price of a 40-strike call option, where both options expire in 3 months. Calculate the amount by which the price of an otherwise equivalent 40-strike put option exceeds the price of an otherwise equivalent 35-strike put option. (A) 1.55 (B) 1.65 (C) 1.75 (D) 3.25 (E) 3.35
15. The current price of a non-dividend paying stock is 40 and the continuously compounded risk-free interest rate is 8%. You enter into a short position on 3 call options, each with 3 months to maturity, a strike price of 35, and an option premium of 6.13. Simultaneously, you enter into a long position on 5 call options, each with 3 months to maturity, a strike price of 40, and an option premium of 2.78. All 8 options are held until maturity. Calculate the maximum possible profit and the maximum possible loss for the entire option portfolio. Maximum Profit Maximum Loss (A) 3.42 4.58 (B) 4.58 10.42 (C) Unlimited 10.42 (D) 4.58 Unlimited (E) Unlimited Unlimited
16. The current price of a non-dividend paying stock is 40 and the continuously compounded risk-free interest rate is 8%. The following table shows call and put option premiums for three-month European of various exercise prices: Exercise Price Call Premium Put Premium 35 6.13 0.44 40 2.78 1.99 45 0.97 5.08 A trader interested in speculating on volatility in the stock price is considering two investment strategies. The first is a 40-strike straddle. The second is a strangle consisting of a 35-strike put and a 45-strike call. Determine the range of stock prices in 3 months for which the strangle outperforms the straddle. (A) The strangle never outperforms the straddle. (B) 33.56 < ST < 46.44 (C) 35.13 < ST < 44.87 (D) 36.57 < ST < 43.43 (E) The strangle always outperforms the straddle.
17. The current price for a stock index is 1,000. The following premiums exist for various options to buy or sell the stock index six months from now: Strike Price Call Premium Put Premium 950 120.41 51.78 1,000 93.81 74.20 1,050 71.80 101.21 Strategy I is to buy the 1,050-strike call and to sell the 950-strike call. Strategy II is to buy the 1,050-strike put and to sell the 950-strike put. Strategy III is to buy the 950-strike call, sell the 1,000-strike call, sell the 950-strike put, and buy the 1,000-strike put. Assume that the price of the stock index in 6 months will be between 950 and 1,050. Determine which, if any, of the three strategies will have greater payoffs in six months for lower prices of the stock index than for relatively higher prices. (A) None (B) I and II only (C) I and III only (D) II and III only (E) The correct answer is not given by (A), (B), (C), or (D)
20. The current price of a stock is 200, and the continuously compounded risk-free interest rate is 4%. A dividend will be paid every quarter for the next 3 years, with the first dividend occurring 3 months from now. The amount of the first dividend is 1.50, but each subsequent dividend will be 1% higher than the one previously paid. Calculate the fair price of a 3-year forward contract on this stock. (A) 200 (B) 205 (C) 210 (D) 215 (E) 220
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