Question 4

As a hedge fund manager, you have a bearish view on Tesla Inc. shares (NASDAQ: TSLA) for the following 2 monthsgiven the uncertainties related to the Covid-19.Assuming Tesla Inc is currently trading at $467.00, the put options witha maturity oftwomonth and an exercise price of $442per share, have a premium (cost) of $1.5per share.The call option witha maturity oftwomonth and an exercise price of $487per share, have a premium (cost) of $3per share.

a.Calculate the cost if you purchase 1,000,000 of the above put options.

b.Determine the share price forTeslashares at which you would choose to "exercise" the above put options.

c.Determine the share price for Tesla shares at which the decision to purchase the above put options effectively "breaks even" for the fund manager.

d.If you don't own any shares, but you still want to make profits during this period. How can you use put and call options to take advantage of the fall in the share price?