(2) If a stock is selling for $25, th expiration of the option is 90 days, what
ID: 2791901 • Letter: #
Question
(2) If a stock is selling for $25, th expiration of the option is 90 days, what are the minimum and maximum prices for the pu e exercise price of a put option on that stock is S20, and the time to (3) The current price of an asset is S75. A three-month, at-the-money Americ call option on the asset has a current value of S5. At what value of the asset will a expiration? covered call writer break even at (4) The current price of an asset is $100. An out-of-the-money American put option with an exercise price (5) A stock index futures contract matures in one year. The cash index currently has a level ofs1,000 with of $90 is purchased along with the asset. If the breakeven point for this hedge is at an asset price of S114 at expiration, whatis the value of the American put at the time of purchase? a dividend yield of 2 %, and the interest rate is 5%, what does the spot-future parity imply a cash index level of?Explanation / Answer
2. The minimum value = $0
Maximum put value = exercise price for American put and the discounted value of European price for European puts, which will be less than the exercise price.
Therefore, Maximum price = $20.
3. Value of the asset = $75- $5 = &70 is the value will a call writer breakeven at expiration.
4. American put at the time of purchase = Asset price at the Breakeven point at expiration - current price of asset
= $114 - $100 = $14.
5. Spot future parity:
P0 = (F0 - K)* e -rt
=(1,000- 20)*e -0.5*1
= 980* 0.95123
= $932.21
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