Question $2$

$(20$ marks$)$

T$.$O$.$T Investments would like you to speculate a rise in the price of a certain stock. The stock price is R$40$ and a $3-$month call$-$option with a strike of R$45$ costs R$5\mathrm{.}8.$ T$.$O$.$T has R$7000$ to invest. You identified $2$ strategies whereby one involves investing in stock of $300$ shares and the other involves $30$ option contracts at par.

i$.$ What is the potential gains and$/$or losses for each strategy if the share price goes up to R$50$ or drops to R$30?$

The following are the spot and forward quotes for $\frac{R}{\text{\$}}$ exchange rate on $12$ February $2020$

$\backslash$table$[[$OFFER$],[$Spot$,$R$15\mathrm{.}26,$R$15\mathrm{.}29,],[1$ month forward,R$15\mathrm{.}20,$R$15\mathrm{.}27,$March$],[3-$month forward,R$15\mathrm{.}18,$R$15\mathrm{.}27,$May$],[6-$month forward,R$15\mathrm{.}15,$R$15\mathrm{.}25,$August$],[9-$month forward,R$15\mathrm{.}10,$R$15\mathrm{.}20,$November$]]$

A treasurer from Mapere Logistics knows that the corporation will $$2$ million in $6$ month and wants to hedge against the exchange moves. The bank agrees that it will sell om the agreed date.

ii$.$ If the spot price rose to R$16$ at the end the $6$ months. How much is the forward contract worth?

iii. If another contract is agreed to by the corporation and bank agrees to exchange $$1$ million at the end of $9-$month while the spot price is R$15.$ How much is the forward contract worth?

iv$.$ Draw a graph indicating when a contract pays off from a long position and a short position