1.Consider the following portfolio: You buy two July 2009 maturity call options
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Question
1.Consider the following portfolio: You buy two July 2009 maturity call options on Dell with exercise price of 30. You also sell two July 2009 maturity put options on Dell with an exercise price of 40. The Call premium is $3.30 and the Put premium is $2.50.
Assume each option contract is for one share of stock.
e. What will be your profit/loss on this position if Dell is selling at $42 on the option maturity date?
f. What will be your profit/loss on this position if Dell is selling at $38 on the option maturity date?
g. At what stock price on the option maturity date will you just break even on your investment?
Make sure that you show or explain all calculations. Make sure you answer all questions above.
2- Consider an option on a non-dividend-paying stock when the stock price is $48, the strike price is $45, the risk-free interest rate is 6% per annum, the volatility is 20% per annum, and the time to maturity is five months. It can be shown that d1 = .7576 and d2 = .6285.
Create a delta neutral portfolio of call options and stock. Short 10,000 call options (100 contracts). How many shares would you buy or sell?
Make sure that you show or explain all calculations. Make sure that you state the number of shares. Make sure that you state whether you would buy or sell the shares
Explanation / Answer
Both are individual and independent question. Answering 1 with subparts.
Answer 1 and 2
P&L at $42
Total
Call (buy) -exercise
premium
-3.3
-3.3
Exercise price
-30
-30
selling price
42
42
Put (sell) - not exercise
premium
2.5
2.5
Net P&L
11.2
11.2
22.4
P&L at $38
Call (buy) -exercise
premium
-3.3
-3.3
Exercise price
-30
-30
selling price
38
38
Put (sell) - exercise
premium
2.5
2.5
Exercise price
-40
-40
selling price
38
38
Net P&L
5.2
5.2
10.4
Answer 3
x-30-premium = 40-x-premium
x-30-3.3 = 40-x-2.5
-33.3-37.5 = -2x
x=70.80/2
x=35.4
P&L at $38
Call (buy) -exercise
premium
-3.3
-3.3
Exercise price
-30
-30
selling price
35.4
35.4
Put (sell) - exercise
premium
2.5
2.5
Exercise price
-40
-40
selling price
35.4
35.4
Net P&L
0
0
0
P&L at $42
Total
Call (buy) -exercise
premium
-3.3
-3.3
Exercise price
-30
-30
selling price
42
42
Put (sell) - not exercise
premium
2.5
2.5
Net P&L
11.2
11.2
22.4
P&L at $38
Call (buy) -exercise
premium
-3.3
-3.3
Exercise price
-30
-30
selling price
38
38
Put (sell) - exercise
premium
2.5
2.5
Exercise price
-40
-40
selling price
38
38
Net P&L
5.2
5.2
10.4
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