Below are stock prices from a production company. No dividends were paid for any
ID: 2739985 • Letter: B
Question
Below are stock prices from a production company. No dividends were paid for any of the listed years.
May, 2012 $100
May, 2013 $80
May, 2014 $75
May, 2015 $120
May, 2016 $100
1. If you purchased $6,000 worth of stocks in 2012 and sold them all in 2015, what was your compound annual rate of return? a. 4.6% b. 20.0% c. 6.3% d. 5.6%
2. In 2014, what was the payoff of 1 long call option (100 shares) with an $80/share strike price and a $4/share premium? a. $400 b. –$7,500 c. $500 d. –$400
3. In 2016, what was the payoff of 2 short put options with a $105/share strike price and a $3/share premium? a. $1,000 b. –$400 c. $21,000 d. $15,000
Explanation / Answer
1. Here, $6,000 is not relevant. The relevant data is that you purchased the stock at $100 and sold it at $120 after holding for 3 years. Apply the standard timevalue formula - FV=PV(1+r/100)n with PV=100, FV=120, n=3 and solve for r. The final value for r = 6.3% (option c)
2. For a call option with strike price of 80$, if the spot price is 75$ in 2014, then the option is out of money. So premium paid will be the loss. Final answer = -$4 * 100 = -$400 (option d)
3. For a put option with strike price of $105, if the spot price is $100 in 2016, then the option is in the money. So profit will be (105-100)-3 = 2$ per share ----> mulitply by 200 ------> 400$ --------> Invert the sign because we have a short position -------> Final answer = -$400 (option b)
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