FIN516 W3 Homework Solutions
Problem 20-6 on Call Options Based on Chapter 20
(Excel file included)
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time.
a) If the stock is trading at $55 in 3 months, what will be the payoff of the call?
b) If the stock is trading at $35 in 3 months, what will be the payoff of the call?
c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration.
Short call: value at expiration date:
a. You owe $15.
b. You owe nothing.
c. Draw the payoff diagram:
Problem 20-8 on Put Options Based on Chapter 20
(Excel file included)
You own a put option on Ford stock with a strike price of $10. The option will expire in exactly 6 months’ time.
a) If the stock is trading at $8 in 6 months, what will be the payoff of the put?
b) If the stock is trading at $23 in 6 months, what will be the payoff of the put?
c) Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration.
Long put value at expiration:
a. $2
b. $0
c. Draw payoff diagram:
Problem 20-11 on Return on Options Based on Chapter 20
Consider the September 2012 IBM call and put options in Problem 20-3. Ignoring any interest you might earn over the remaining few days’ life of the options, consider the following.
a) Compute the break-even IBM stock price for each option (i.e., the stock price at which your total profit from buying and then exercising the option would be 0).
b) Which call option is most likely to have a return of −100%?
c) If IBM’s stock price is $216 on the expiration day, which option will have the highest return?
a. For calls, strike + ask. For puts, strike – ask.
b. 215 call option is worthless if IBM is below 215.
c. 210 call option has return of 6/.42 – 1 = 1,329%.
Problem 21-12 on Option Valuation Using the Black Scholes Model Based on Chapter 21
Rebecca is interested in purchasing a European call on a hot new
(Excel file included)
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time.
a) If the stock is trading at $55 in 3 months, what will be the payoff of the call?
b) If the stock is trading at $35 in 3 months, what will be the payoff of the call?
c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration.
Short call: value at expiration date:
a. You owe $15.
b. You owe nothing.
c. Draw the payoff diagram:
Problem 20-8 on Put Options Based on Chapter 20
(Excel file included)
You own a put option on Ford stock with a strike price of $10. The option will expire in exactly 6 months’ time.
a) If the stock is trading at $8 in 6 months, what will be the payoff of the put?
b) If the stock is trading at $23 in 6 months, what will be the payoff of the put?
c) Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration.
Long put value at expiration:
a. $2
b. $0
c. Draw payoff diagram:
Problem 20-11 on Return on Options Based on Chapter 20
Consider the September 2012 IBM call and put options in Problem 20-3. Ignoring any interest you might earn over the remaining few days’ life of the options, consider the following.
a) Compute the break-even IBM stock price for each option (i.e., the stock price at which your total profit from buying and then exercising the option would be 0).
b) Which call option is most likely to have a return of −100%?
c) If IBM’s stock price is $216 on the expiration day, which option will have the highest return?
a. For calls, strike + ask. For puts, strike – ask.
b. 215 call option is worthless if IBM is below 215.
c. 210 call option has return of 6/.42 – 1 = 1,329%.
Problem 21-12 on Option Valuation Using the Black Scholes Model Based on Chapter 21
Rebecca is interested in purchasing a European call on a hot new