The following information applies to problems (4) through (7): Currently, one sh
ID: 2481649 • Letter: T
Question
The following information applies to problems (4) through (7): Currently, one share of ABC stock is valued at 92. You are given the following prices of European options on one share of this stock: Call Put One-year 90-strike 11.65 4.40 One-year 95-strike 8.30 5.75 The force of interest is 6%. (FYI, the force of interest is often called the continuouslycompounded rate of interest.) (These problems ask you to calculate the profit or loss on the expiration date of the options. Thus, you will want to adjust any option premiums paid or received at the beginning of the life of the options, to their values at the end of the life of the options; this adjustment will reflect the time value of money.)
(5) You buy one 90-strike put option. On the expiration date of the option, ABC stock has a price of 83 per share. Find your profit or loss on the expiration date of the option.
Explanation / Answer
Strike Price=90 Strike Price=95 Call Option premium 11.65 Call Option premium 8.3 Put Option premium 4.4 Put Option premium 5.75 Buy 1 call option @ strike price 95 Option premium = 8.30 Strike price = 95 Actual Price = 99 Since, AP > SP Call Buyer will exercise the option Net profit = AP-SP-OP = 99-95-8.30 = -4.3 Sell 1 put option @ strike price 90 Option premium = 4.4 Strike price = 90 Actual Price = 99 Since, AP > SP Put Buyer will not exercise the option Net profit of put buyer = OP paid = -4.4 when put buyer doesn’t exercise then no obligation on put seller to perform. Hence, Loss of put buyer will be Profit of put seller. Net profit of put seller = 4.4 Total Profit on expiration date = -4.3+4.4 = 0.1
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