7. Suppose a financial manager buys call options on 50,000 barrels of oil with a
ID: 2722165 • Letter: 7
Question
7. Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $88 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise price of $88 per barrel. Consider her gains and losses if oil prices are $80, $87, $88, $89, and $96. (Do not round intermediate calculations. Leave no cells blank - be certain to enter "0" wherever required. A negative answer should be indicated by a minus sign.)
Market Price $80 $87 $88 $89 $96 Payoffs per barrel $ $ $ $ $Explanation / Answer
1. At 80
Call option: She will not exercise her option since the price is below exercise price
Put Option: the buyer of the put option will exercise and will sell at $88 and make the profit. So her loss will be $8*50,000 = 400,000
Loss = - $400,000
2. At 87
Call option: She will not exercise her option since the price is below exercise price
Put Option: the buyer of the put option will exercise and will sell at $87 and make the profit. So her loss will be $1*50,000 = 50,000
Loss = - $50,000
3. At 88
Both will have 0 Value ( No loss, No gain) = $0
4. At 89
Call Option: Profit of $1, So total profit = 1 * 50000 = $50,000
Put option: The buyer will not exercise and there is no loss
So profit = +$ 50,000
5. At 96:
Call Option: Profit of $8, So total profit = 8 * 50000 = $400,000
Put option: The buyer will not exercise and there is no loss
So profit = +$ 400,000
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