Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You own 100 stocks of Amazon's stock. The current stock price is $3,120. You believe that the stock price will double in two years, but

image text in transcribed

You own 100 stocks of Amazon's stock. The current stock price is $3,120. You believe that the stock price will double in two years, but you have a strong feeling that the stock price will drop in the next six months due to the current economic conditions. Therefore, based on your expectations, you want to benefit from the stock price movement by writing options without giving up your stock. The options available in the CBOE are as follows: Option type strike price maturity call 3080 3 months call 3100 3 months call 3120 3 months put 3080 3 months put 3100 3 months put 3120 3 months i) What is the name of the strategy you will create that includes both the stocks you own and the options you will write? Which option will you choose and why? ii) The price of a call option on Amazon's stock that expires in 9 months with a strike price of $3,080 is $400. If the 9-month Treasury bill is 1.315% (APR rate), what is the implied volatility? iii) Using the implied volatility in the previous question, and based on the Black-Scholes-Merton model, what is the expected revenue from this strategy you chose in part (i)? You own 100 stocks of Amazon's stock. The current stock price is $3,120. You believe that the stock price will double in two years, but you have a strong feeling that the stock price will drop in the next six months due to the current economic conditions. Therefore, based on your expectations, you want to benefit from the stock price movement by writing options without giving up your stock. The options available in the CBOE are as follows: Option type strike price maturity call 3080 3 months call 3100 3 months call 3120 3 months put 3080 3 months put 3100 3 months put 3120 3 months i) What is the name of the strategy you will create that includes both the stocks you own and the options you will write? Which option will you choose and why? ii) The price of a call option on Amazon's stock that expires in 9 months with a strike price of $3,080 is $400. If the 9-month Treasury bill is 1.315% (APR rate), what is the implied volatility? iii) Using the implied volatility in the previous question, and based on the Black-Scholes-Merton model, what is the expected revenue from this strategy you chose in part (i)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Public Finance

Authors: Harvey S Rosen, Ted Gayer

9th International Edition

0071267883, 9780071267885

More Books

Students also viewed these Finance questions

Question

1. To generate a discussion on the concept of roles

Answered: 1 week ago