Problem 20-8

The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $110 per share for months, and you believe it is going to stay in that range for the next 6 months. The price of a 6-month put option with an exercise price of $110 is $9.87.

a.

If the risk-free interest rate is 6% per year, what must be the price of a 6-month call option on C.A.L.L. stock at an exercise price of $110 if it is at the money? (The stock pays no dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Price of a 6-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 prices future movement?

Stock price's future movement

(Click to select)Sell a straddleSell a callSell a putBuy a straddleBuy a callBuy a put

b-2.	What is the most money you can make on this position? (Do not round intermediate calculations.Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Amount

$

b-3.	How far can the stock price move in either direction before you lose money? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Stock price

$

c.

How can you create 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? (Do not round intermediate calculations. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Position	Immediate CF	CF in 6 months
		ST < X	ST > X
Call (long)			(Click to select)(St 110)(St 110)
Put (short)		(Click to select)(110 St)(110 St)
Lending position
Total		(Click to select)StS0	(Click to select)S0St