The common stock of Sophia Enterprises serves as the underlying asset for the following derivative securities: (1) forward contracts, (2) European-style call options, and (3) European-style put options.

a. Assuming that all Sophia derivatives expire at the same date in the future, complete a table similar to the following for each of the following contract positions:

(1) A long position in a forward with a contract price of $50

(2) A long position in a call option with an exercise price of $50 and a front-end premium expense of $5.20

(3) A short position in a call option with an exercise price of $50 and a front-end premium receipt of $5.20
In calculating net profit, ignore the time differential between the initial derivative expense or receipt and the terminal payoff.
b. Graph the net profit for each of the three derivative positions, using net profit on the vertical axis and Sophia’s expiration date stock price on the horizontal axis. Label the breakeven (i.e., zero profit) point(s) on each graph.
c. Briefly describe the belief about the expiration date price of Sophia stock that an investor using each of these three positions implicitlyholds.

Transcribed Image Text:

Initial Expiration Date Expiration Date Sophia Sbock Price Dorivativo Payoff Derivative Prom Net Profit 25 30 35 40 45 50 60 65 70 75