To draw: A payoff graph to depict the portfolio in which a call option is written at strike price $195 and a put option is written at an exercise price of $190 in the month of January. Introduction: Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

Question

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Answer 1

Question

Chapter 20, Problem 20PS

a

Summary Introduction

To draw: A payoff graph to depict the portfolio in which a call option is written at strike price $195 and a put option is written at an exercise price of $190 in the month of January.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To compute: The profit or loss on the position where IBM sells an option at $198 and $205 on expiry date and after effect of selling at $160.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

c.

Summary Introduction

To evaluate: The break-even point of investment at two stock prices.

Introduction:

Break-even point on investment: This specifies when an investment will start generating a positive return. This can be computed easily with simple mathematics.

d.

Summary Introduction

To analyze: The kind of betting the investor is making and the belief of investor to justify the stock price.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

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Suppose you construct a strategy based on options on a stock that is currently selling for $100. The strategy is as follows: Buy one call option having an exercise price of $95. Sell two calls having an exercise price of $100. Buy one call option having an exercise price of $105. All of the options are written on the same stock and all have the same expiration date. Compute the payoff (the dollars you receive) from this strategy at the expiration date for each of the following alternative stocks prices: $90, $95, $98, $100, $102, $105, and $110. What additional information would be required to determine whether your strategy had been profitable? What is the name of this strategy?

Assume the following inputs for a call option: (1) current stock price is $25, (2) strike price is $28, (3) time to expiration is 4 months, (4) annualized risk-free rate is 5%, and (5) variance of stock return is 0.33. Use the Black-Scholes model to find the price for the call option. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 2

Question

Chapter 20, Problem 20PS

a

Summary Introduction

To draw: A payoff graph to depict the portfolio in which a call option is written at strike price $195 and a put option is written at an exercise price of $190 in the month of January.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To compute: The profit or loss on the position where IBM sells an option at $198 and $205 on expiry date and after effect of selling at $160.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

c.

Summary Introduction

To evaluate: The break-even point of investment at two stock prices.

Introduction:

Break-even point on investment: This specifies when an investment will start generating a positive return. This can be computed easily with simple mathematics.

d.

Summary Introduction

To analyze: The kind of betting the investor is making and the belief of investor to justify the stock price.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

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Answer 3

Question

Chapter 20, Problem 20PS

a

Summary Introduction

To draw: A payoff graph to depict the portfolio in which a call option is written at strike price $195 and a put option is written at an exercise price of $190 in the month of January.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To compute: The profit or loss on the position where IBM sells an option at $198 and $205 on expiry date and after effect of selling at $160.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

c.

Summary Introduction

To evaluate: The break-even point of investment at two stock prices.

Introduction:

Break-even point on investment: This specifies when an investment will start generating a positive return. This can be computed easily with simple mathematics.

d.

Summary Introduction

To analyze: The kind of betting the investor is making and the belief of investor to justify the stock price.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

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Answer 4

Question

Chapter 20, Problem 20PS

a

Summary Introduction

To draw: A payoff graph to depict the portfolio in which a call option is written at strike price $195 and a put option is written at an exercise price of $190 in the month of January.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To compute: The profit or loss on the position where IBM sells an option at $198 and $205 on expiry date and after effect of selling at $160.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

c.

Summary Introduction

To evaluate: The break-even point of investment at two stock prices.

Introduction:

Break-even point on investment: This specifies when an investment will start generating a positive return. This can be computed easily with simple mathematics.

d.

Summary Introduction

To analyze: The kind of betting the investor is making and the belief of investor to justify the stock price.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

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Answer 5

Chapter 20, Problem 20PS

a

Summary Introduction

To draw: A payoff graph to depict the portfolio in which a call option is written at strike price $195 and a put option is written at an exercise price of $190 in the month of January.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To compute: The profit or loss on the position where IBM sells an option at $198 and $205 on expiry date and after effect of selling at $160.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

c.

Summary Introduction

To evaluate: The break-even point of investment at two stock prices.

Introduction:

Break-even point on investment: This specifies when an investment will start generating a positive return. This can be computed easily with simple mathematics.

d.

Summary Introduction

To analyze: The kind of betting the investor is making and the belief of investor to justify the stock price.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

Answer 6

Chapter 20, Problem 20PS

a

Summary Introduction

To draw: A payoff graph to depict the portfolio in which a call option is written at strike price $195 and a put option is written at an exercise price of $190 in the month of January.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

Answer 7

Chapter 20, Problem 20PS

a

Summary Introduction

To draw: A payoff graph to depict the portfolio in which a call option is written at strike price $195 and a put option is written at an exercise price of $190 in the month of January.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

Answer 8

b.

Summary Introduction

To compute: The profit or loss on the position where IBM sells an option at $198 and $205 on expiry date and after effect of selling at $160.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

Answer 9

b.

Summary Introduction

To compute: The profit or loss on the position where IBM sells an option at $198 and $205 on expiry date and after effect of selling at $160.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

Answer 10

c.

Summary Introduction

To evaluate: The break-even point of investment at two stock prices.

Introduction:

Break-even point on investment: This specifies when an investment will start generating a positive return. This can be computed easily with simple mathematics.

Answer 11

c.

Summary Introduction

To evaluate: The break-even point of investment at two stock prices.

Introduction:

Break-even point on investment: This specifies when an investment will start generating a positive return. This can be computed easily with simple mathematics.

Answer 12

d.

Summary Introduction

To analyze: The kind of betting the investor is making and the belief of investor to justify the stock price.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

Answer 13

d.

Summary Introduction

To analyze: The kind of betting the investor is making and the belief of investor to justify the stock price.

Introduction:

Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

Answer 14

Expert Solution & Answer

Answer 15

Expert Solution & Answer

Answer 16

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Answer 17

Ch. 20 - Prob. 1PS Ch. 20 - Prob. 2PS Ch. 20 - Prob. 3PS Ch. 20 - Prob. 4PS Ch. 20 - Prob. 5PS Ch. 20 - Prob. 6PS Ch. 20 - Prob. 7PS Ch. 20 - Prob. 8PS Ch. 20 - Prob. 9PS Ch. 20 - Prob. 10PS

Solution Summary: The author explains that a payoff graph depicts the portfolio in which an investor has control over both call option and put option of the same asset.

Videos

To evaluate: The break-even point of investment at two stock prices.

Introduction:

Break-even point on investment: This specifies when an investment will start generating a positive return. This can be computed easily with simple mathematics.

Want to see the full answer?

Chapter 20 Solutions

Solution Summary: The author explains that a payoff graph depicts the portfolio in which an investor has control over both call option and put option of the same asset.

Videos

To evaluate: The break-even point of investment at two stock prices. Introduction: Break-even point on investment: This specifies when an investment will start generating a positive return. This can be computed easily with simple mathematics.

Want to see the full answer?

Chapter 20 Solutions

To evaluate: The break-even point of investment at two stock prices.

Introduction:

Break-even point on investment: This specifies when an investment will start generating a positive return. This can be computed easily with simple mathematics.