Scenario A

Investor A has a holding in the shares of Company E$,$ a company

predominantly involved in the food retailing industry. The current share price

of Company E is R$30$ a share.

You have been reading reports lately indicating that the elevated inflationary

environment will negatively impact on the profits of the company, as it

struggles to pass the higher prices onto consumers. The investor is uncertain

of the direction and magnitude of this impact on the stock price. She has asked

you for some help.

The following are strike prices and option premiums for three$-$month European

call and put options available to Investor A:

Exhibit $1$: Three$-$month European call and put options strike prices and

premiums

Option Strike price Premium

Call :STRIKE PRICE R$40$

Premium R$3\mathrm{.}00$

Put strike price R$25$

premium R$2\mathrm{.}50$

Scenario B

Trader B has just sold a six$-$month American call option $($with a premium of R$8$

and a strike price of R$70)$ on a company that is currently trading at R$50$ a

share.

A few months later, the company$$s shares are trading at R$95$ a share.

One option contract is made up of $100$ shares.

Scenario C

The following information on a one$-$year interest rate swap $($IRS$)$ settlement

has been provided:

Notional principle

IRS rate

R$50000000$

Reset period

$8\mathrm{.}95\%$ NACQ

JIBAR

$91$ days

$7\mathrm{.}25\%$

$5\mathrm{.}1-$Identify which option the investor should buy, based on the scenario

facing Company E in Scenario A$,$ and justify your answer.

$(2)$

Calculate the break$-$even price for the option you recommended in your

response to $5\mathrm{.}1.$

$(1)$

With reference to Scenario B$,$ identify whether Trader B will make a

profit$/$loss if the call is exercised by the buyer. Also, calculate the

profit$/$loss$.$

Note: show all calculations and round off your final answers to $2$ decimal

places.

$(3)$

With reference to Scenario C$,$ calculate the settlement amount for the

one$-$year IRS and explain whether the fixed$-$rate payer will make or

receive the payment for the settlement amount.

Note: show all calculations and round off your final answers to $2$ decimal

places.