20-6. You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time.
a. If the stock is trading at $55 in three months, what will be the payoff of the call?
b. If the stock is trading at $35 in three months, what will be the payoff of the call?
c. Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration.
Long call option: value at expiration:
c. Draw graph:
20-8. You own a put option on Ford stock with a strike price of $10. The option will expire in exactly six months’ time.
a. If the stock is trading at $8 in six months, what will be the payoff of the ...view middle of the document...
Rebecca is interested in purchasing a European call on a hot new stock, Up, Inc. The call has a strike price of $100 and expires in 90 days. The current price of Up stock is $120, and the stock has a standard deviation of 40% per year. The risk-free interest rate is 6.18% per year.
a. Using the Black-Scholes formula, compute the price of the call.
b. Use put-call parity to compute the price of the put with the same strike and expiration date.
a. Using the Black-Sholes formula:
PV(K) = = 98.487,
b. Using put-call parity:
30-6. Your utility company will need to buy 100,000 barrels of oil in 10 days time, and it is worried about fuel costs. Suppose you go long 100 oil futures contracts, each for 1000 barrels of oil, at the current futures price of $60 per barrel. Suppose futures prices change each day as follows:
a. What is the mark-to-market profit or loss (in dollars) that you will have on each date?
b. What is your total profit or loss after 10 days? Have you been protected against a rise in oil prices?
c. What is the largest cumulative loss you will experience over the 10-day period? In what case might this be a problem?
a. You have gone long 100 × 1000 = 100,000 barrels of oil. Therefore, the mark-to-market profit or loss will equal 100,000 times the change in the futures price each day.
b. Summing the daily profit/loss amounts, the total is a gain of $250,000. This gain offsets your increase in cost from the overall $2.50 increase in oil prices over the 10 days, which increases your total cost of oil by 100,000 × $2.50 = $250,000.
c. After the second day, you have lost a total of $250,000. This loss could be a problem if you do not have sufficient resources to cover the loss. In that case, your position would have been liquidated on day 2, and you would have been...