Question 6

Telstra has borrowed a variable interest rate loan from ANZ. The management is concerned that a rise in interest rate could reduce profitability. How can Telstra use a financial instrument to manage the risk?

Peter bought a call option on Telstra shares with an exercise price of $60 and an expiry date of three months, as well as a put option on Telstra shares with the same exercise price and same expiration date. The market price for Telstra shares today is $57.20. The call price is trading at $1.45. The put price is trading at $3.70.

Draw a fully labelled diagram for the payoff of the call option.

Draw a fully labelled diagram for the payoff of the put option.

What will the Telstra share price be at the expiration date so that Peter can make an overall profit from the two options?

[2+(3+3+2)] = 10 marks