Mod 6 11/30 Chapter 15 # 4, 10, 18 Chapter 16 # 10, 25, 28, 29 Chapter 17 # 2, 4, CFA 1 4) Turn back to figure 15.1, which list the price of various IBM options. Use the data in the figure to calculate the payoff and profits for investments in each of the following July expiration options, assuming that the stock price on the expiration date is $95 a) call option, x=90 b) put option, x=90 c) call option, x=95 d) put option, x=95 e) call option, x=100 f) put option, x=100 10) Suppose you think Walmart stock is going to appreciate substantially in value in the next year. Say the stock’s current price, S0 is $100, and the call option expiring in one year has an exercise price, X, of $100 and is selling at a price, C, of $10. With $10,000 to invest, you are considering three alternatives: a) Invest all $10,000 in the stock, buying 100 shares b) Invest all $10,000 in 1,000 options (10 contracts) c) Buy 100 options (one contract) for $1,000 and invest the remaining $9,000 in a money market fund paying 4% interest annually. What is your rate of return for each alternative for four stock prices one year from now? Summarize your results in the table and diagram below. 18) In what ways is owning a corporate bond similar to writing a put option? A call option? 10) Use the Black-Scholes formula to find the value of a call option on the following stock Time to expiration = 6 months Standard deviation = 50% per year Stock price = $50 Interest rate = 3% 25) These three put options all are written on the same stock. One has a delta of -.9, one a delta of -.5, and one a delta of -.1 Assign deltas to the three puts by filling in the table below 28) You are very bullish (optimistic) on stock EFG, much more so than the rest of the market. In each equation, chose the portfolio strategy that will give you the biggest dollar profit if your bullish forecast turns out to be correct. Explain your answer. a) Choice A: $100,000 invested in calls with X=5 Choice B: $100,000 invested in EFG stock b) Choice A: 10 call options contracts (for 100 shares each), with X=50 Choice B: 1,000 shares of EFG stock 29) You are attempting to value a call option with an exercise price of $100 and one year to expiration. The underlying stock pays no dividends, its current price is $100, and you believe it has a 50% chance of increasing to $120 and a 50% chance of decreasing to $80. The risk free rate of interest is 10%. Calculate the call option’s value using the two state stock price model. 2) The current level of the S&P 500 is 800. The dividend yield on S&P 500 is 2%. The risk free rate interest rate is 1%. What should a futures contract with a one-year maturity be selling for? 4) You purchase a Treasury-bond futures contract with an initial margin requirement of 15% and a futures price of $115,098. The contract is traded on a $100,000 underlying par value bond. IF the futures price falls to $108,000 what will be the percentage loss on your position? CFA 1) The open interest on a futures contract at any given time is the total number of outstanding a) b) c) d) Contracts Unhedged positions Clearinghouse positions Long and short positions
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