Option Markets and Strategies

Problems Set ANSWER ALL $5$ QUESTIONS PLEASE

$1.$A call option with a strike price of $$60$ on a stock selling at $$70$ costs $$10\mathrm{.}8.$ What are the call option's

intrinsic and time values? $($Round your answers to $2$ decimal places.$)$

$2.$ An investor buys a call at a price of $$5\mathrm{.}90$ with an exercise price of $$54.$ At what stock price will the

investor break even on the purchase of the call? $($Round your answer to $2$ decimal places.$)$

$3.$ You establish a straddle on Walmart using September call and put options with a strike price of $$59.$

The call premium is $$4\mathrm{.}70$ and the put premium is $$5\mathrm{.}45.$

a$.$ What is the most you can lose on this position? $($Input the amount as positive value. Round your answer to $2$ decimal places.$)$

b$.$ What will be your profit or loss if Walmart is selling for $$67$ in September? $($Input the amount as positive value. Round your answer to $2$ decimal places.$)$

c$.$ At what stock prices will you break even on the straddle? $($Input your answers from highest to lowest to receive credit for your answers. Round your answers to $2$ decimal places.$)$

$4.$Toyota Motor Company is listed on the Tokyo Stock Exchange at a price of $1,560$ per stock. You believe that the price of Toyota Motor stock will increase substantially from its current level, and you are considering buying shares in the company. You have $15,600$ to invest and have different

options: Invest all $15,600$ in stocks.

Invest all $15,600$ in options. Call options on Toyota Motor Company that expire in six months and have an exercise price of $1,525$ are available on the TSE. Each call option costs $100.$

Buy $10$ call options and invest the remaining money in treasury bills yielding $4\%.$

a$-1.$ Assuming that at the expiration date, the stock price of Toyota Motor Company has

increased to $1,680,$ what is the six months rate of return for each of the three strategies?

$($Negative values should be indicated by a minus sign. Round your answers to $2$

decimal places.$)$

a$-2.$ Is there a strategy that you would prefer during a boom?

b$-1.$ Assuming that at the expiration date, the stock price of Toyota Motor Company has

decreased to $1,430,$ what is the six months rate of return for each of the three strategies?

$($Negative values should be indicated by a minus sign. Round your answers to $2$

decimal places.$)$

b$-2.$ Is there a strategy that you would prefer during a recession?

c$.$ At what stock price would the seller of the call option break even?

d$.$ What it the maximum loss you may suffer in each of the three positions?

e$.$ Considering the above data, compare and contrast the size of the potential payoff and the risk involved in each of these alternatives.

$5.$The common stock of Air$-$France KLM is currently trading on the French stock exchange at $47.$ On the market, you can find a put and call available for Air$-$France KLM with an exercise price of $46$ and an expiration in three months. The put and the call are currently traded at the respective prices of

$0\mathrm{.}30$ and $0\mathrm{.}80.$

You are given a sequence of possible stock price in three months: $41,43,45,47,49,51,53,55.$

a$.$ Compute the profit at the expiration date for each possible stock price when you are long on the

AirFrance KLM call. $($Negative amounts should be indicated by a minus sign. Round youranswers to $2$ decimal places.$)$

b$.$ Compute the profit at the expiration date for each possible stock price when you are short on the Air$-$France KLM call. $($Negative amounts should be indicated by a minus sign. Round your

answers to $2$ decimal places.$)$

c$-1.$ Draw a profit diagram of the two positions computed in the two previous questions.

Instructions:

Use the line tool $($Short$,$ plot $2$ points$)$ to draw the profit diagram of position $1.$

Use the line tool $($Long$,$ plot $2$ points$)$ to draw the profit diagram of position $2.$

c$.$ At what price would the call break even? $($Round your answer to $2$ decimal places.$)$

d$.$ Compute the profit at expiration date for each possible stock price when$-$ you are long on the

AirFrance KLM put option. $($Negative amounts should be indicated by a minus sign. Round your answers to $2$ decimal places.$)$

e$.$ Compute the profit at expiration date for each possible stock price when$-$ you are short on the AirFrance KLM put option. $($Negative amountbe indicated by a minus sign. Round your answers to $2$ decimal places.$)$

f$.$ at what price would the put break even?