The common stock of the P.U.T.T. Corporation has been trading n a narrow price r

Question

The common stock of the P.U.T.T. Corporation has been trading n a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next 3 months. You do not know whether it will go up or down, however. The current price of the stock is $120 per share, and the price of a 3 - month call option at an exercise price of $120 is $5.20. a. If the risk - free interest rate is 7% per year, what must be the price of a 3 - month put option on P.U.T.T. stock at an exercise price of $120? (The stock pays no dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the ''$'' sign in your response.) b. What would be a simple options strategy to exploit your conviction about the stock price's future movements? How far would it have to move in either direction for you to make a profit on your initial investment? (Round your intermediate calculations and final answer to 2 decimal places. Omit the ''$'' sign in your response.)

Explanation / Answer

(a)The equation expressing put-call parity is:

C + PV(x) = P + S

where:

C = price of the European call option=$5.20

PV(x) = the present value of the strike price (x), discounted from the value on the expiration date at the risk-free rate=120PVIFA(0.583%,3)=120*2.9654=$355.848

P = price of the European put=?

S = spot price, the current market value of the underlying asset=$120

SO,5.2+355.848=P+120

361.048=P+120

P=$235.848

(b) VARIOUS OPTIONS STRATEGIES AVAILABLE ARE

Bullish strategies

Bearish strategies

Neutral or non-directional strategies

  

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