On 1^st April 2022, Joseph bought a call option of PUPU stocks from the writer at exercise price of RM22/share at a premium of RM2/share for 3 months contract for 4000 shares. In the same day, Alan sell a call option of YUYU stocks at exercise price of RM10/share at a premium of RM1.50/share for 3 months contract for 20,000 shares.

To protect his funds from the volatility of the prices in the market, Alan long a put option at an exercise price of 900 points at a premium of 20 points for 2 months in the middle of May 2022. Besides, he also short a put option on in the same day 2 months contract at an exercise price of 920 points at a premium 30 points for 2 months contract.

Required:

1. Conclude the aim of Joseph enters all the above strategies.

(6 marks)

(CLO2:PLO2:C6)

2. Justify is Joseph At-The-Money (ATM) if he trades in the middle of July if both stock options prices and index options prices reduced by 10%. Is he will exercise both contracts? Why?

(8 marks)

(CLO2:PLO2:C6)

3. Assess when Joseph will be In-The-Money (ITM) for PUPU stocks and YUYU stocks if the stock prices increased by RM5 upon maturity. Is he will exercise both contracts? Why? [Hint: used price from(b)]

(6 marks)

(CLO2:PLO2:C6)

4. Interpret Joseph position upon maturity if the index options reduced by 30 points. Is he will exercise both contracts? Why? [Hint: used price from(b)]

(6 marks)

(CLO2:PLO2:C6)

5. From (c) and (d), evaluate total profit and loss for Joseph. Recommend Joseph among the four strategies, which contract is the best for him?

(4 marks)

(CLO2:PLO2:C6)