Principles of Investment

cenglhfucngry
timer Asked: Dec 17th, 2017

Question Description

Question 4

An at the money 3-month call option on the XYZ stock is currently trading at $52.82 on CBOE. An investor wishes to price a three-month put option on XYZ stock. Suppose, the put is also at the money (i.e. currently the price of the stock is exactly the same as the exercise price of the option written on this stock.) Take the volatility of the return on SPX to be 15% and the risk-free rate to be 6%. Find the price of the put option.

  • Find the price of the put option, using put call parity
  • Find the price of the put option using Black Sholes option pricing formula for puts

Question 5

The common stock of Sternco is currently trading at $40 per share. Sternco is currently “in play” as a take-over target and is not expected to pay any dividends for the next 6 months. You believe that if management is successful at repelling all offers, the stock price will fall significantly, but if they are unsuccessful, the stock price will rise significantly. You want to profit from either outcome. The risk-free rate is 10% and a 6-month put option with an exercise price of $40 is selling at $4.

  1. A dealer offers you a 6-month European call option with an exercise price of $40. What is a fair price for this option?
  2. Propose a strategy to take advantage of your beliefs that uses the above mentioned put and call options. That is the strategy that allows you to profit from both: the significant price increase and decrease. Your answer should include the payoff table and graph.

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