PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 20, Problem 9PS
Option combinations Suppose that Mr. Colleoni borrows the present value of $100, buys a six-month put option on stock Y with an exercise price of $150, and sells a six-month put option on Y with an exercise price of $50.
- a. Draw a position diagram showing the payoffs when the options expire.
- b. Suggest two other combinations of loans, options, and the underlying stock that would give Mr. Colleoni the same payoffs.
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Suppose you combine two option contracts as follows. You buy a call option on a stock with an exercise price of $65 for a premium of 9$. At the same time you sell a call option on the same stock with an exercise price of $75 for a premium of $4. Both calls expire at the same time. The stock sells currently at $72. Answer the following questions about this investment strategy:
1. Determinethevalueatexpiration(thepayoffs)andtheprofitunderthefollowingoutcomes: a. The price of the stock at expiration is $78b. The price of the stock at expiration is $69c. Thepriceofthestockatexpirationis$62
2. Determine the following:a. The maximum profit
b. The maximum loss
3. Determinethebreakevenstockpriceatexpiration(thestockpriceforwhichyourstrategydeliversno profit and no loss).
4. Depictthepayoffandprofitdiagramsofyourinvestmentstrategy.
A speculative investor creates a portfolio of options written on the same underlying asset. He chooses to sell a put option with a strike of $100 and sell a call option also with a strike of $100. The two options have the same expiration.
a. Sketch the payoff at maturity for a seller of a put option with a strike of $100. Carefully label the axes.
b. Sketch the payoff at maturity for a seller of a call option with a strike of $100. Carefully label the axes.
c. Sketch the payoff at maturity for the investor who sells both a call option and a put option each with a strike of $100. Carefully label the axes. The put option price is $14, and the price of the call option is $6.
d. What is the profit at maturity for the speculative investor if the underlying asset at maturity is worth $100?
A stock price is $30. An investor buys one call option contract on the stock with a strike price of $28 and sells a call option contract on the stock with a strike price of $27. The market prices of the options are $2 and $1.7, respectively. The options have the same maturity date. Describe the investor’s position and the possible gain/loss he will get (taking into account the initial investment). Make a graph of your gain/loss.
Chapter 20 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 20 - Vocabulary Complete the following passage: A _____...Ch. 20 - Option payoffs Note Figure 20.12 below. Match each...Ch. 20 - Option payoffs Look again at Figure 20.12. It...Ch. 20 - Option payoffs What is a call option worth at...Ch. 20 - Option payoffs The buyer of the call and the...Ch. 20 - Option combinations Suppose that you hold a share...Ch. 20 - Option combinations Dr. Livingstone 1. Presume...Ch. 20 - Option combinations Suppose you buy a one-year...Ch. 20 - Option combinations Suppose that Mr. Colleoni...Ch. 20 - Option combinations Option traders often refer to...
Ch. 20 - Prob. 11PSCh. 20 - Option combinations Discuss briefly the risks and...Ch. 20 - Put-call parity A European call and put option...Ch. 20 - Putcall parity a. If you cant sell a share short,...Ch. 20 - Putcall parity The common stock of Triangular File...Ch. 20 - Put-call parity What is put-call parity and why...Ch. 20 - Putcall parity There is another strategy involving...Ch. 20 - Putcall parity It is possible to buy three-month...Ch. 20 - Putcall parity In April 2017, Facebooks stock...Ch. 20 - Option bounds Pintails stock price is currently...Ch. 20 - Option values How does the price of a call option...Ch. 20 - Option values Respond to the following statements....Ch. 20 - Option values FX Bank has succeeded in hiring ace...Ch. 20 - Option values Is it more valuable to own an option...Ch. 20 - Option values Youve just completed a month-long...Ch. 20 - Option values Table 20.4 lists some prices of...Ch. 20 - Option bounds Problem 21 considered an arbitrage...Ch. 20 - Prob. 30PSCh. 20 - Prob. 31PSCh. 20 - Prob. 32PS
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