Answered step by step
Verified Expert Solution
Question
1 Approved Answer
REMINDER: Don't provide answers alone without showing your work. Question 1 (14 marks) Use the Wall Street Journal listing below to answer this question. Underlying
REMINDER: Don't provide answers alone without showing your work. Question 1 (14 marks) Use the Wall Street Journal listing below to answer this question. Underlying stock Facebook (FB) $75.95 Put 3.95 3.01 5.72 Strike Call Oct-14 Oct-14 75 80 1.65 Nov-14 Nov-14 75 80 4.85 3.97 2.64 6.74 Consider the following options portfolio: You write an October 2014 expiration call option on FACEBOOK with exercise price $80. You also write an October expiration FACEBOOK put option with exercise price $75. a. Graph the payoff of this portfolio at option expiration as a function of FACEBOOK's stock price at that time. (3 marks) b. What will be the profit/loss on this position if FACEBOOK is selling at $77 on the option expiration date? What if FACEBOOK is selling at $83? (6 marks) c. At what two stock prices will you just break even on your investment? (4 marks) d. What kind of "bet" are you making: that is, what must you believe about FACEBOOK's stock price to justify this position? (1 mark) Question 2 (8 marks) The multiplier for a futures contract on a certain stock market index is $250. The maturity of the contract is one year, and the current level of the index is 1,250. The risk-free interest rate is 0.4% per month. The dividend yield on the index is 0.1% per month. Suppose that after one month, the stock index is at 1,280. a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly. (6 marks) b. Find the one-month holding-period returm if the initial margin on the contract is $12,500. (2 marks) Total: 22 marks REMINDER: Don't provide answers alone without showing your work. Question 1 (14 marks) Use the Wall Street Journal listing below to answer this question. Underlying stock Facebook (FB) $75.95 Put 3.95 3.01 5.72 Strike Call Oct-14 Oct-14 75 80 1.65 Nov-14 Nov-14 75 80 4.85 3.97 2.64 6.74 Consider the following options portfolio: You write an October 2014 expiration call option on FACEBOOK with exercise price $80. You also write an October expiration FACEBOOK put option with exercise price $75. a. Graph the payoff of this portfolio at option expiration as a function of FACEBOOK's stock price at that time. (3 marks) b. What will be the profit/loss on this position if FACEBOOK is selling at $77 on the option expiration date? What if FACEBOOK is selling at $83? (6 marks) c. At what two stock prices will you just break even on your investment? (4 marks) d. What kind of "bet" are you making: that is, what must you believe about FACEBOOK's stock price to justify this position? (1 mark) Question 2 (8 marks) The multiplier for a futures contract on a certain stock market index is $250. The maturity of the contract is one year, and the current level of the index is 1,250. The risk-free interest rate is 0.4% per month. The dividend yield on the index is 0.1% per month. Suppose that after one month, the stock index is at 1,280. a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly. (6 marks) b. Find the one-month holding-period returm if the initial margin on the contract is $12,500. (2 marks) Total: 22 marks
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started