For each case below, you are the trader on the opposite side of the trade with m
ID: 2785699 • Letter: F
Question
For each case below, you are the trader on the opposite side of the trade with me at time to(= 0). For each case below, state the trade you will perform with me at time to0) 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 yearExplanation / Answer
I sincerely apologize for the inconvenience caused to you. But, the answer to all the questions seems to be the same.
I will try to make you understand the logic behind it.
I will go Long one European Call on all the trades and the reason for it is because.
The Spot Price (So) is at 100 and the Strike Price (K) is at 96. Therefore, even after paying the trade price of 1. I will be in IN THE MONEY that is the call buyer pay off will be 100 - 96 -1 = 3.
Similarly, the call buyer will have a positive payoff on all the situations as even after paying the trade price the buyer ends up being IN THE MONEY
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