1. The price of a stock is $60. The price of a one-year European put option on t

Question

1.    The price of a stock is $60. The price of a one-year European put option on the stock with a strike price of $30 is quoted as $6 and the price of a one-year European call option on the stock with a strike price of $50 is quoted as $4.

Assume each option contract is for one share of stock.

·         Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options today. What is the investor’s profit or loss if the stock price is $45 in one year?

·         Suppose that an investor shorts 100 shares, buys 100 call options, and shorts 100 put options today. What is the investor’s profit or loss if the stock price is $65 in one year?

Make sure that you show or explain all calculations. Make sure you answer all questions above.

Explanation / Answer

profit or loss = ((50 - 45 + 4 -6 )x 100 shares = $300 profit
Profit or loss = (50 - 65+ 4 - 6) x 100 shares = -$1700 loss

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