Problem 14-01

The common stock of Sophia Enterprises serves as the underlying asset for the following derivative securities: (1) forward contracts, (2) European-style call options, and (3) European-style put options.

1. Assuming that all Sophia derivatives expire at the same date in the future, complete the following tables for each of the contract positions below. In calculating net profit, ignore the time differential between the initial derivative expense or receipt and the terminal payoff. Do not round intermediate calculations. Round your answers to the nearest cent. If your answer is zero, enter "0". Use a minus sign to enter negative values, if any.

   1. A long position in a forward with a contract price of $49.

      Expiration Date Sophia Stock Price	Expiration Date Derivative Payoff		Initial Derivative Premium		Net Profit
      $25	$		$		$
      $30	$		$		$
      $35	$		$		$
      $40	$		$		$
      $45	$		$		$
      $50	$		$		$
      $55	$		$		$
      $60	$		$		$
      $65	$		$		$
      $70	$		$		$
      $75	$		$		$

   2. A long position in a call option with an exercise price of $49 and a front-end premium expense of $5.45.

      Expiration Date Sophia Stock Price	Expiration Date Derivative Payoff		Initial Derivative Premium		Net Profit
      $25	$		$		$
      $30	$		$		$
      $35	$		$		$
      $40	$		$		$
      $45	$		$		$
      $50	$		$		$
      $55	$		$		$
      $60	$		$		$
      $65	$		$		$
      $70	$		$		$
      $75	$		$		$

   3. A short position in a call option with an exercise price of $49 and a front-end premium receipt of $5.45. Assume the call is uncovered.

      Expiration Date Sophia Stock Price	Expiration Date Derivative Payoff		Initial Derivative Premium		Net Profit
      $25	$		$		$
      $30	$		$		$
      $35	$		$		$
      $40	$		$		$
      $45	$		$		$
      $50	$		$		$
      $55	$		$		$
      $60	$		$		$
      $65	$		$		$
      $70	$		$		$
      $75	$		$		$

2. Choose the correct net profit graph for each of the three derivative positions, assuming net profit on the vertical axis and Sophia's expiration date stock price on the horizontal axis. Do not round intermediate calculations. Round your answers for the breakeven point to the nearest cent.

   1. A long position in a forward with a contract price of $49.

      The correct graph is -Select-graph Agraph Bgraph Cgraph DItem 100 .

      A.
      B.
      C.
      D.

      The breakeven (i.e., zero profit) point is $ .

   2. A long position in a call option with an exercise price of $49 and a front-end premium expense of $5.45.

      The correct graph is -Select-graph Agraph Bgraph Cgraph DItem 102 .

      A.
      B.
      C.
      D.

      The breakeven (i.e., zero profit) point is $ .

   3. A short position in a call option with an exercise price of $49 and a front-end premium receipt of $5.45.

      The correct graph is -Select-graph Agraph Bgraph Cgraph DItem 104 .

      A.
      B.
      C.
      D.

      The breakeven (i.e., zero profit) point is $ .

3. What is the belief about the expiration date price of Sophia stock that an investor using each of these three positions implicitly holds?

   The long position in a forward with a contract price of $49: The purchaser believes that the price of Sophia Enterprises stock will be -Select-above $43.55above $49.00above $54.45below $43.55below $49.00below $54.45Item 106 .

   The long position in a call option with an exercise price of $49 and a front-end premium expense of $5.45: The purchaser believes that the price will be -Select-above $43.55above $49.00above $54.45below $43.55below $49.00below $54.45Item 107 .

   The short position in a call option with an exercise price of $49 and a front-end premium receipt of $5.45: The seller believes that the price of Sophia Enterprises stock will be -Select-above $43.55above $49.00above $54.45below $43.55below $49.00below $54.45Item 108