Q6. You hold 1,000 shares in ABC plc which are currently priced at 400p. ABC has developed a revolutionary wireless technology. If trials prove successful the share price will rise significantly. If trials not successful, the share price will collapse. Required: (a) Explain and illustrate how you could use the traded options market to hedge your position. Further information (Hint: Go for Sep. puts with the 380 exercise price and explain what happens to overall profit/loss if the share price falls to 300p or raises to 500p in September). Current time: 30 March. Traded option quotes on ABC plc on 30 March: Strike ABC plc 380 400 420 May 45 20 5 Calls Jul 62 30 10 Sep 75 40 15 May 6 22 43 Puts Jul 11 33 58 Sep 16 44 71 (b) What is meant by intrinsic value, time value, in-the-money, at-the-money and out-of-the- money? Use the above table to illustrate. (c) Draw a graph showing the profit and loss for the writer of Sep 400 put option at share prices ranging from 250p to 550p. Clearly indicate all relevant points on axes. Explain the graph. (d) Draw a graph showing the profit and loss for the holder (buyer) of Sep 400 put option at the same share price range. Clearly indicate all relevant points on axes. How this graphs differs from graph in part (c)? Q6. You hold 1,000 shares in ABC plc which are currently priced at 400p. ABC has developed a revolutionary wireless technology. If trials prove successful the share price will rise significantly. If trials not successful, the share price will collapse. Required: (a) Explain and illustrate how you could use the traded options market to hedge your position. Further information (Hint: Go for Sep. puts with the 380 exercise price and explain what happens to overall profit/loss if the share price falls to 300p or raises to 500p in September). Current time: 30 March. Traded option quotes on ABC plc on 30 March: Strike ABC plc 380 400 420 May 45 20 5 Calls Jul 62 30 10 Sep 75 40 15 May 6 22 43 Puts Jul 11 33 58 Sep 16 44 71 (b) What is meant by intrinsic value, time value, in-the-money, at-the-money and out-of-the- money? Use the above table to illustrate. (c) Draw a graph showing the profit and loss for the writer of Sep 400 put option at share prices ranging from 250p to 550p. Clearly indicate all relevant points on axes. Explain the graph. (d) Draw a graph showing the profit and loss for the holder (buyer) of Sep 400 put option at the same share price range. Clearly indicate all relevant points on axes. How this graphs differs from graph in part (c)
