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Question 1 (Main question is question2) Cathy is bullish on Tencent; so she instructs her broker to sell 15/7/2020 European 500 put options on Tencent
Question 1 (Main question is question2)
Cathy is bullish on Tencent; so she instructs her broker to sell 15/7/2020 European 500 put options on Tencent with an exercise price of $400 each share. Sandy agrees to buy these options and pays the premium of $7 each option. Without taking any transaction costs into consideration,
- what will be Sandys gain or loss if Tencents price is $385 each share on 15/7/2020? (2 marks)
- what would be Cathys potential maximum loss on 15/7/2020? (2 marks)
- what is Cathys break-even price? (2 marks)
Question 2
Re-visit Question 1. If the current price of each share is $380,
- show how to determine Sandys initial margin.
- show how to determine Cathys initial margin.
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