The following information applies to problems (4) through (7): Currently, one sh
ID: 2750860 • Letter: T
Question
The following information applies to problems (4) through (7): Currently, one share of ABC stock is valued at 92. You are given the following prices of European options on one share of this stock: Call Put One-year 90-strike 11.65 4.40 One-year 95-strike 8.30 5.75 The force of interest is 6%. (FYI, the force of interest is often called the continuouslycompounded rate of interest.) (These problems ask you to calculate the profit or loss on the expiration date of the options. Thus, you will want to adjust any option premiums paid or received at the beginning of the life of the options, to their values at the end of the life of the options; this adjustment will reflect the time value of money.)
(7) You buy one 90-strike call option and you also buy one 90-strike put option. On the expiration date of the option, ABC stock has a price of 75 per share. Find your profit or loss on the expiration date of the option.
Explanation / Answer
Total cash otflow on purchase of put and call option with a strike price of $90 = $11.65+4.40 = $16.05
If on expiration date of option ABC stock has a price of $75 per share then option buyer will excercise put option and in that scnario profit or loss to the buyer will be as follows:
Profit on excercise of option ($90-75) $15
Less: Premium $16.05
Total loss ($1.05)
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