1/ "Fairuz" Case: For risk management purposes, "Fairuz" decided to undertake a strategy consisting of buying a put with a strike price of 21.10$ for 1.15$, buying a put with a strike price of 16.24$ for 0.16$, and selling two puts with a strike price of 19.9$ for 0.65$ each. She entered this position for 1500 contracts that would expire in 3 months from now. a/ What is the amount of her initial investment? b/ What is the amount of her max gain?
1/ "Fairuz" Case: For risk management purposes, "Fairuz" decided to undertake a strategy consisting of buying a put with a strike price of 21.10$ for 1.15$, buying a put with a strike price of 16.24$ for 0.16$, and selling two puts with a strike price of 19.9$ for 0.65$ each. She entered this position for 1500 contracts that would expire in 3 months from now. a/ What is the amount of her initial investment? b/ What is the amount of her max gain?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:1/ "Fairuz" Case:
For risk management purposes, "Fairuz" decided to undertake a strategy consisting of
buying a put with a strike price of 21.10$ for 1.15$, buying a put with a strike price of
16.24$ for 0.16$, and selling two puts with a strike price of 19.9$ for 0.65$ each. She
entered this position for 1500 contracts that would expire in 3 months from now.
a/ What is the amount of her initial investment?
b/ What is the amount of her max gain?
c/ What is her gain/loss if the stock price in 3 months is 17$ ?
d/ What is her (gain/loss) if the stock price in 3 months is lower than the medium strike
price by 70 basis points?
g/ What are the breakeven price(s)?
(using the highest and lowest strike prices)
2/ "BANCO" Case:
A US firm "BANCO" is specialized in providing loans to international firms. In 32 days from
now "BANCO" is going to lend $11.75 millions to firm "AAA" for 45 days to help it extend its
international trade operations. The lending/borrowing rate in US is LIBOR plus 85 basis
points. The risk managers of "BANCO" decided to use options to hedge their position
especially that the LIBOR rate in US was very volatile during the last few months. Therefore
they decided to use an option with 45 days in underlying and a strike interest rate of 2.25%.
We suppose that "BANCO" does not have money to buy the option right now. The current
LIBOR in US is 2.55% and the option costs the bank $5600 with a notional principal of $11.5
millions.
a/ Compute the Effective annual rate on the loan made by "BANCO" if the LIBOR in 32 days
from now is 2% ?
b/ Compute the Effective annual rate on the loan made by "BANCO" if the LIBOR in 32 days
from now is 2.85% ?
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