Problem 20-8

The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $50 per share for months, and you believe it is going to stay in that range for the next three months. The price of a 3-month put option with an exercise price of $50 is $4.

a. If the risk-free interest rate is 10% per year, what must be the price of a 3-month call option on C.A.L.L. stock at an exercise price of $50 if it is at the money? (The stock pays no dividends.)

Price of a 3-month call option $___________

b-1.What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?

Strategy_____________?

b-2. What is the most money you can make on this position?

Amount___________

b-3. How far can the stock price move in either direction before you lose money?

Stock Price $___________

c. Solve for a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration? What is the net cost of establishing that position now?

Position Immediate CF

Call (long) ______________

Put (short ______________

Lending Position __________

Total ______________