1) What is the payoff to a short forward position if the forward price is $40 an

Question

1) What is the payoff to a short forward position if the forward price is $40 and the underlying stock price at expiration is $60? What would be the payoff to a purchased put option with a strike price of $40 on the same underlying stock expiring at the same time?

Selected Answer $-17.30 (wrong)

a) $-14.50

b) $17.30

c) $-17.30

d) $2.80

e) $14.50

2) Suppose the effective annual interest rate is 10%. Consider a 1-year call option on a stock with an exercise price of $45 and an option premium of $8.23. What profit does the owner of this call earn if the underlying stock is worth $52 when the option is exercised?

a) $16.05

b) $-1.23

c) $-2.05

d) $2.08

e) $7.00

3) Suppose the effective annual interest rate is 10%. Consider a 1-year put option on a stock with an exercise price of $80 and an option premium of $15.66. What profit does the owner of this put earn if the underlying stock is worth $54 when the option is exercised?

a) $26.00

b) $10.34

c) $43.23

d) $8.77

e) $10.77

4) What is the payoff to a short forward position if the forward price is $40 and the underlying stock price at expiration is $60? What would be the payoff to a purchased put option with a strike price of $40 on the same underlying stock expiring at the same time?

a) short forward payoff = $–20; put payoff = $0

b) short forward payoff = $0; put payoff = $0

c) short forward payoff = $0; put payoff = $–20

d) short forward payoff = $0; put payoff = $20

e) short forward payoff = $–20; put payoff = $–20

5) Which of the following contracts should be more expensive?

a) A long put option on Stock I with a strike price of $60

b) A short forward contract on Stock I with a forward price of $60

c) Both the call and the forward should be equally valuable.

Explanation / Answer

1)Solved in 4th part

2.EP = $45

Option Premium = $8.23

Interest lost on premium = 8.23*10% = $0.823

Profit on Expiry = 52 – 45- 8.23 – 0.823

-$2.05 i.e. c

3. Put Option

EP = $80

Option Premium = $15.66

Interest lost on premium = 15.66*10% = $1.566

Profit on Expiry = 80-54-15.66-1.566

= $8.77 i.e. d

4.Short forward position payoff

Sell @ $40

Buy @ $ 60

Payoff = -$20

Put Option – Right to Sell

Since price at expiration is $60 i.e more than Exercise price, put option holder will not exercise.

Payoff = $0

Hence, a

5.Both contracts will enable the user to sell the share @$60

But under put option, premium will be paid which is not required to be paid under the forward contract. Hence, put will be more expensive

Hence, a

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