Assume the following: 1. All positions held for 6 months 2. Risk free rate = 4%
ID: 2645288 • Letter: A
Question
Assume the following:
1. All positions held for 6 months
2. Risk free rate = 4% per year (2% for six months)
Option prices are:
Strike
Call
Put
$ 950
$120.405
$ 51.777
1000
93.809
74.201
1020
84.470
84.470
1050
71.802
101.214
Suppose you buy the underlying for $1000, buy a $950-strike put and sell a $1050-strike call. Draw the profit diagram. Find the maximum loss, gain, and breakeven stock price.
Strike
Call
Put
$ 950
$120.405
$ 51.777
1000
93.809
74.201
1020
84.470
84.470
1050
71.802
101.214
Explanation / Answer
Maximum Loss = -1000 -51.777 + 120.405 = -931.372
Maximum gain = (-1000 + 1050) + (1050 - 950) -51.777 + 120.405 = 218.628
Breakeven price = (-1000 + X) + (X - 950) -51.777 + 120.405 = 0
X = 940.686 But at this price put will be worthless therefore modified price will be:
= 1000 - (-51.777 + 120.405)
= 931.372
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