# Finance Homework -4, chapters 6 and 7 done on 2015

Question 1a.Construct a table of the investors profit (loss) given the following stock prices atexpiration: \$10, 15, 20, 25, 30, 35, 40, 45, 50.purchaseexercise\$2.00\$30.00\$45.00\$13.00\$50.00\$18.00\$45.00\$(2.00)\$50.00\$(2.00)AnswerStock Priceprofit or Loss\$10.00\$(2.00)\$15.00\$(2.00)\$20.00\$(2.00)\$25.00\$(2.00)\$30.00\$(2.00)\$35.00\$3.00\$40.00\$8.00b. Now construct a table assuming the option had been a put option instead of a calloption.AnswerStock Priceprofit or Loss\$10.00\$18.00\$15.00\$13.00\$20.00\$8.00\$25.00\$3.00\$30.00\$(2.00)\$35.00\$(2.00)\$40.00\$(2.00)c. Graph the profit/loss schedules in parts (a) and (b). Indicate at what stockprices the investor would breakeven with both the call and put options.AnswerBreackeven-Call&Put Opt ionsRow 6Row 12d. If the investor had purchased both the call and the put, what type of strategy would theybe using?AnswerThe type of strategy when investor purchasing a combination of a call and a put, each withthe same exercise price and expiration date called " Straddle"2.An investor owns a share of 3M (originally purchased at \$55) and writes a call optionon the same stock and sells it for \$3.00 with an exercise price of \$55.a. In what type of strategy has the investor engaged?AnswerThis strategy is known as "Covered Call", when investor write a call on anasset together with buying the asset.b.Construct a table showing the profit (loss) to the investor assuming the following stockprices when the call option expires: \$30, 35, 40, 45, 50, 55, 60, 65, 70. (Note you mustconsider both the profit (loss) on the 3M stock and the option.)exerciseselling cost\$55.00\$3.00AnswerStock Priceprofit\$30.00\$(22.00)\$35.00\$(17.00)\$40.00\$(12.00)\$45.00\$(7.00)\$50.00\$(2.00)\$55.00\$3.00\$60.00\$3.00\$65.00\$3.00\$70.00\$3.00c. Now assume instead of writing a call option, the investor bought a put option at th+A47esame price. What type of strategy is this?AnswerProtective Put strategy that aim to guarantee minimum proceeds equal to the put’sexercise price.d. Given (c) above, construct a table showing the investors profit (loss) assuming thefollowing stock prices when the put option expires: \$30, 35, 40, 45, 50, 55, 60, 65, 70.(Note you must consider both the profit (loss) on the 3M stock and the option.)exerciseselling cost\$55.00\$3.00AnswerStock Priceprofit\$30.00\$(3.00)\$35.00\$(3.00)\$40.00\$(3.00)\$45.00\$(3.00)\$50.00\$(3.00)\$55.00\$(3.00)\$60.00\$2.00\$65.00\$7.00\$70.00\$12.003. You currently own both a call option and a put option on the same stock. Explain what willhappen to the prices (values) of both options given the following changes, and justify yourreasons. Consider each change as independent of the other changes.a.The price of the underlying stock decreases.Answerwhen the underlying stock decrease, the call option should decrease invalue as well because the payoff to call will decease; conversely, the putoption would increase.b.The time to maturity of the option nears.Answershort time to maturity would result in decrease the values of call and putoptions because there is shorter time for future event to affect prices, andthe range of likely stock prices decrease.c.The underlying stock becomes more volatile.AnswerThe call and put options values would increase when there is more volatileof the underlying stock due to higher predicted prices fluctuation.d.The underlying stock increases its dividends.Answera higher the dividends must lower expected rate of capital gain, whichwould result of lowering the call option; while the Put option will increase.4. On March 1, 2005, a trader went long on wheat at \$3.00/bushel (5,000 bushel contract). The position remained open until March 7th. The trader wasrequired to post an initial margin of \$3,000, and must maintain a margin of \$2,000. Fill in the missing values in the table below, given the daily settlementprices.AnswerPriceamountpost intial matginmaintain a marginDateSettlement Price1-Mar\$15,000.002-Mar\$15,150.003-Mar\$15,300.004-Mar\$14,400.005-Mar\$13,900.006-Mar\$15,000.007-Mar\$15,400.00\$3.005,000.00 contract price\$3,000.00\$2,000.00Daily Mark to MarketBeginning Margin Balance Deposit (Withdrawal) Ending Margin Balance\$\$3,000.00\$\$3,000.00\$150.000\$3,150.00\$(150.00)\$3,000.00\$150.000\$3,150.00\$(150.00)\$3,150.00\$(900.000)\$2,250.00\$750.00\$2,100.00\$(500.000)\$1,600.00\$1,400.00\$2,500.00\$1,100.000\$3,600.00\$(600.00)\$4,100.00\$400.000\$4,500.00\$(1,500.00)\$3,400.00\$400.000What is the traders profit (loss) when the position closes on March 7?\$400.00Answer\$15,000.005.Suppose the spot price for oil is \$40.00/barrel. The cost of carry for one year is 8%, and is an accurateestimate of what the price of oil would be in one year. If a trader can take a long position in a futures contract (1,000barrels) for delivery of oil at \$41.00 in one year, and the transaction cost is \$.15/barrel, is the long position profitablefor the trader? What would be the profit (loss)?Answerspot price (current)cost / Yearfuture contract(barrels)price of future contractTransation cost per barrel\$40.008%1,000.00\$41.00\$0.15spot price future43350410002350Yest it would be profit for the trade because spot price bigger than future contract.profit2350

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