3 Question 3 For each case below, you are the trader on the opposite side of the

Question

3 Question 3 For each case below, you are the trader on the opposite side of the trade with me at time to0 For each case below, state the trade you will perform with me at time to 0) For each case, you must explain the reason for your trading decision In all cases, both you and I begin with a portfolio of zero (no cash, no stock, options, etc.). 1. Money required to buy things must be borrowed from me. Interest must be paid on the loan 2. Money received by selling things is loaned to me. I will pay interest on the savings 3. The borrow and lend interest rates are equal. Both are equal to the risk-free rate. 4. There is no limit on the quantity to buy or sell anything, including short selling of stock. In all the cases below I. The current value of the stock price is So = 100. 2. The stock does not pay dividends. 3. For questions involving a stock index, the current value of the index is 1000 points 4. The stock index has a continuous dividend yield of 1.5%. 5. The interest rate is 5% (borrow and lend rates are equal). 6. All the options have the same expiration time of 1 year. 7. All the forward/futures contracts have the same expiration time of 1 year See next page.

Explanation / Answer

a) Long one european call:

Since strike price is $105 if the trading price is $1(assuming 100), investors will not exercise the option.

b) Short one european put:

Since strike price is $105 if the trading price is $100, investor will exercise his option and go short and hence make a profit $5.

c) Short one forward contract

Since forward price is $105 if the trading price is $100, investor will go short and hence make a profit of $5.

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

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