(a) The table below gives information about European options with a maturity date of 6 months. Type Of option Strike Price Call 65 Call 58 Put 65 Premium 5 8 4 (i) Devise the payoff profile of the hedging strategy from the above for an investor betting on an increase in the stock price and calculate the payoff if the stock price increases to $66 after 6 months. (8 marks) (ii) Suppose that another investor expects a big stock price movement but is not sure of the direction. She however bets that the downward movement is more likely. Devise the corresponding trading strategy and calculate the payoff if the stock price is $55 after 6 months. (8 marks) (b) By analysing the pay off profiles of a protective put strategy and a straddle, discuss in what ways these strategies shield the investor from potential losses.
(a) The table below gives information about European options with a maturity date of 6 months. Type Of option Strike Price Call 65 Call 58 Put 65 Premium 5 8 4 (i) Devise the payoff profile of the hedging strategy from the above for an investor betting on an increase in the stock price and calculate the payoff if the stock price increases to $66 after 6 months. (8 marks) (ii) Suppose that another investor expects a big stock price movement but is not sure of the direction. She however bets that the downward movement is more likely. Devise the corresponding trading strategy and calculate the payoff if the stock price is $55 after 6 months. (8 marks) (b) By analysing the pay off profiles of a protective put strategy and a straddle, discuss in what ways these strategies shield the investor from potential losses.
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
Problem 1PS
Related questions
Question
Transcribed Image Text:(a) The table below gives information about European options with a maturity date of
6 months.
Type Of option
Strike Price
Call
65
Call
58
Put
65
Premium
5
8
4
(i) Devise the payoff profile of the hedging strategy from the above for an investor
betting on an increase in the stock price and calculate the payoff if the stock price
increases to $66 after 6 months.
(8 marks)
(ii) Suppose that another investor expects a big stock price movement but is not sure
of the direction. She however bets that the downward movement is more likely.
Devise the corresponding trading strategy and calculate the payoff if the stock price
is $55 after 6 months.
(8 marks)
(b) By analysing the pay off profiles of a protective put strategy and a straddle,
discuss in what ways these strategies shield the investor from potential losses.
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