Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Problem 3 (32 points) You would like to construct a position that will have a constant ceiling on the total profit if stock price goes
Problem 3 (32 points) | |||||||||
You would like to construct a position that will have a constant "ceiling" on the total profit if stock price goes down | |||||||||
and a constant "floor" on the total loss if the price goes up. Use must use two put options to achieve this result. | |||||||||
You have access to two put options with the following characteristics: | |||||||||
Option A: strike price of $40, the price of this put option is $3 per share. | |||||||||
Option B: strike price is $35, the price of this put option is $2 per share | |||||||||
Both options have the same time to maturity and can only be excercised on expiration date. | |||||||||
| |||||||||
(a) Describe you position in the two put options. (8 points) | |||||||||
| |||||||||
Given your answer in part a answer parts b, c, d and e about the combined position. | |||||||||
(b) What is your total profit or loss per share if the stock price is $38 at expiration? (5 points) | |||||||||
| |||||||||
(c.) What is your total profit or loss per share if the stock price is $5 at expiration? (5 points) | |||||||||
| |||||||||
(d) What is your total profit or loss per share if the stock price is $50 at expiration? (4 points) | |||||||||
| |||||||||
(e) Below draw the per share profit profiles for each of the options you have selected in part a | |||||||||
and their combined (total) profit at expiration (label each axis, each profile and all breakeven points) | |||||||||
(10 points) |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started