Tyco International currently has a stock price of $27. It also has eight options

Question

Tyco International currently has a stock price of $27. It also has eight options available with the following Expiration Date, Strike Price (Exercise Price), and Option Price. For Example, you can buy a June 30 Put for $3.50 (or you could sell it for $3.50). The risk free rate is 2% between now and June and 4% between now and Sept.

1. What is the Time Value of the June 30 Put option?

a) $0             b) $.50              c) $1.09            d)   $3.00      

2. How could you earn a risk-free profit using the Sept 30 options?

a)         Buy the Stock and the Put, Sell the Bond and the Call

b)         Buy the Stock and the Call, Sell the Bond and the Put

c)         Buy the Bond and the Put, Sell the Stock and the Call

d)         Buy the Bond and the Call, Sell the Stock and the Put

3. Suppose you sold the June 25 Call option and the stock price ends up being $26. How much is your total profit or loss (including the purchase of the option)?

a) $1 loss         b) $1 profit       c) $2 profit       d) $3 profit

Explanation / Answer

1. What is the Time Value of the June 30 Put option?-B) $.50   

2. How could you earn a risk-free profit using the Sept 30 options? -C) Buy the Bond and the Put, Sell the Stock and the Call

3. Suppose you sold the June 25 Call option and the stock price ends up being $26. How much is your total profit or loss (including the purchase of the option)?- D) $3 profit

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