Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Solve it on a paper by showing the formulas please. Not by excel. Thank you
Transcribed Image Text:4. An investor makes the following two investments in a put, P, and a call, C, options with
a stock, S as the underlying:
(ii) the purchase of a put option for £1.13 with a strike price of £40, and
(iii) the purchase of a call option for £1.16 with a strike price of £40.
The stock is currently trading at £40 and the expiry is one month from now.
Answer the following questions:
What the maximum profit and loss for this position?
Draw the profit and loss diagram for this strategy as a function of the
stock price at expiration, both before and after premia.
(a)
(b)
(c)
What is the option strategy above called and why might an investor
want to hold this position?
(d)
Assume that one month from now the stock price can be either 41 or 39.
Calculate the Hedge ratio of the Call option.
(e)
Discuss the difference between American and European options. If the
above options were European options, what can be said about the price of the
corresponding American options?
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