subject: financial derivates

Alan wants to take advantage of ITM option on the total premium received. Therefore, in January 2022, he shorts call an ABA stock at the exercise price of RM10/share with the premium of RM1.10/share. And he short put of CAC stock at exercise price of RM22/share with the premium of RM2.50/share. Both he bought for 1000 shares. One month later, he long call BAB stocks for 2000 shares at exercise price of RM12/share and the premium is RM1.50/share. One-month later the market price for ABA and CAC are increase by 10%, while BAB stock decline by 5%. Both ABA and CAC are an American style while the BBA stock is an European style stock. Two months later, upon maturity, ABA stock declines 5%, CAC and BAB increase by 10% from the previous month.

Required: a) Construct when all the stocks would be ITM? (Hint: May use any of the changes as of the price as above) (6 marks) (CLO2:PLO6:C2)

b) How much is the total premium paid and total premium received from all the strategies? (3 marks) (CLO2:PLO6:C5)

c) What is his profit loss upon maturity? (Hint: to support with all the diagrams involved) (12 marks) (CLO2:PLO6:C5)

d) What is rational for Alan to enter the above strategies? Is Alan achieved his objectives? (6 marks) (CLO2:PLO6:C5)