QUESTION 3 (20 MARKS)

Ali Baba as a holder buy a call option and initiate the contract with Jack Ma on 1st of June 2020 for 3 months with exercise price of RM35/share. He has to pay the option price (premium) of RM1/share and trade for 5000 shares. While Bruce Lee as a writer sell an option contract with Donald Trump on 1st March 2020 for 6 months. The exercise price is 900 points and the option price is 20 points.

Obama buy a put option from Elizabeth Taylor on 1st June 2020 for 3 months at exercise price of 920 points with the cost of 30 points. The market was very slow in last April 2020 until June 2020 due to pandemic Covid 19. However, the market slowly changes after the government made an announcement that all sectors can proceed as usual.

On last 4th May 2020, the market price was dropped to RM30/share while the index dropped to 860 points. Then the KLCI increased to 1100 points on 19th July 2020 and the market price increased to RM55/share. On 19th August 2020, the market was volatile and it leads to both KLCI and market price increase by 10% compared to 19th July price.

Required:

1. Differentiate the expectation of Ali Baba, Bruce and Obama on the underlying market price.

(3 marks)

2. Advise to Ali Baba, Bruce Lee and Obama either they shall exercise on 19th August 2020 and how much the profit/loss will earn by each of them?

(8 marks)

3. If the market price dropped to RM35.60, should Ali Baba exercise? Proof your explanation with calculations.

(5 marks)

4. How much the payoff for Bruce Lee and Obama upon maturity?

(4 marks)