Stock ABC and Stock XYZ have the same current price of $50, and they offer the s

Question

Stock ABC and Stock XYZ have the same current price of $50, and they offer the same distribution of future returns (with the same expected return and the same standard deviation). There exists a call option on one share of Stock ABC and a call option on one share of Stock XYZ. The options have identical exercise prices of $49 and they expire on the same date. The call premium on each option is $3.

A.) Are the options currently “in” or “out” of the money?

B.) What is the intrinsic value and the time value of each option today?

C.) What is the break-even future stock price associated with the options?

D.) What is the net profit or loss associated with purchasing either option if the future stock price is $30.

E.) What is the net profit or loss associated with writing either option if the future stock price is $48?

F.) What is the net profit or loss associated with writing either option if the future stock price is $51?

G.)What is the net profit or loss associated with writing either option if the future stock price is $80?

H.) Assume that there is a third call option, based on the average price of Stocks ABC and XYZ, with the same expiration date as the first two options. The exercise price of this option is $49. Should the price (call premium) of the third option be higher than, lower than, or equal to the prices of the two options on the individual stocks in the following two cases? (Briefly explain your answer in each case).

-The correlation between the returns of the ABC and XYZ is +1

-The correlation between the returns of the two stocks is +0.3

Explanation / Answer

Ans) Current Price $50 Exercise price $49 Call Premium $3 A.) Are the options currently “in” or “out” of the money? ans) Current Price 50 Less:- Premium -3 47 Exercise Price $49 The Theoretical Price is less then exercise price then this option if Out of money B.) What is the intrinsic value and the time value of each option today? Ans) Intrinsic Value = Different between the opexercise price and the exercise price and the underlying asset's current market price Maximum of [(MP-EP),0] Intrinsic Value Tme value Maximum of [(Premium -Intrinsic value),0] [(3-1),0] C.) What is the break-even future stock price associated with the options? If the future price is $46 then we are on break even D.) What is the net profit or loss associated with purchasing either option if the future stock price is $30. If future Market price is $30 He not exercise the option We can get profit of premium amount $3 E.) What is the net profit or loss associated with writing either option if the future stock price is $48? If he is writing Call option and market price is $48 then he can avail $3 as a profit If he is writing put option and market price is $48 then he can avail $2 Profit F.) What is the net profit or loss associated with writing either option if the future stock price is $51? If he is writing Call option and market price is $51 hen he can avail $1 as a profit If he is writing put option and market price is $51 then he can avail $3 Profit G.)What is the net profit or loss associated with writing either option if the future stock price is $80? If he is writing Call option and market price is $80 hen he can avail $28 as a loss If he is writing put option and market price is $51 then he can avail $3 Profit H.) Assume that there is a third call option, based on the average price of Stocks ABC and XYZ, with the same expiration date as the first two options.   The exercise price of this option is $49. Should the price (call premium) of the third option be higher than, lower than, or equal to the prices of the two options on the individual stocks in the following two cases? (Briefly explain your answer in each case). Ans) If he like to avail the first two option with exercise price of $49 then he can avail the third option with higher price then if the holder of the option his exercise the two option then he not exercise the third option because the third option price is very highly If he like to avail the first two option with exercise price of $49 then he can avail the third option with lower price then if the holder of the option his exercise the first option then he not exercise the two option because the third option price is less highly. If the market price is more then two option the the holder of the option can exercise all three options If he like to avail the first two option with exercise price of $49 then he can avail the third option with Same price then if the holder of the Ans) Current Price $50 Exercise price $49 Call Premium $3 A.) Are the options currently “in” or “out” of the money? ans) Current Price 50 Less:- Premium -3 47 Exercise Price $49 The Theoretical Price is less then exercise price then this option if Out of money B.) What is the intrinsic value and the time value of each option today? Ans) Intrinsic Value = Different between the opexercise price and the exercise price and the underlying asset's current market price Maximum of [(MP-EP),0] Intrinsic Value Tme value Maximum of [(Premium -Intrinsic value),0] [(3-1),0] C.) What is the break-even future stock price associated with the options? If the future price is $46 then we are on break even D.) What is the net profit or loss associated with purchasing either option if the future stock price is $30. If future Market price is $30 He not exercise the option We can get profit of premium amount $3 E.) What is the net profit or loss associated with writing either option if the future stock price is $48? If he is writing Call option and market price is $48 then he can avail $3 as a profit If he is writing put option and market price is $48 then he can avail $2 Profit F.) What is the net profit or loss associated with writing either option if the future stock price is $51? If he is writing Call option and market price is $51 hen he can avail $1 as a profit If he is writing put option and market price is $51 then he can avail $3 Profit G.)What is the net profit or loss associated with writing either option if the future stock price is $80? If he is writing Call option and market price is $80 hen he can avail $28 as a loss If he is writing put option and market price is $51 then he can avail $3 Profit H.) Assume that there is a third call option, based on the average price of Stocks ABC and XYZ, with the same expiration date as the first two options.   The exercise price of this option is $49. Should the price (call premium) of the third option be higher than, lower than, or equal to the prices of the two options on the individual stocks in the following two cases? (Briefly explain your answer in each case). Ans) If he like to avail the first two option with exercise price of $49 then he can avail the third option with higher price then if the holder of the option his exercise the two option then he not exercise the third option because the third option price is very highly If he like to avail the first two option with exercise price of $49 then he can avail the third option with lower price then if the holder of the option his exercise the first option then he not exercise the two option because the third option price is less highly. If the market price is more then two option the the holder of the option can exercise all three options If he like to avail the first two option with exercise price of $49 then he can avail the third option with Same price then if the holder of the option can exercise all option or he can reject the all options option can exercise all option or he can reject the all options

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.