Problem 2-26 Refer to the stock options on Apple in the Figure 2.9. Suppose you

Question

Problem 2-26

Refer to the stock options on Apple in the Figure 2.9. Suppose you buy a July expiration call option with exercise price $350.

If the stock price in July is $358, will you exercise your call?

What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

What is the net profit/loss on your position? (Input the amount as a positive value.)

What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

Refer to the stock options on Apple in the Figure 2.9. Suppose you buy a July expiration call option with exercise price $350.

Explanation / Answer

a-1 July call strike 350 is available at $9, Thus if stock price in 358, which is $8 increase, we will exercise the call option because stock price is more than exercize price.

a-2 Stock price increase by $8, Call premium paid =$9, Thus we are in loss by $1

a-3, Rate of return is = -1/9 = -11.11%

b-1 call with the exercise price $355 is available for $5.6, to be in profit stock price should be 355+5.6 = $360.6 which is less than $358 stock price. But we will still exercize call option because stock price is greater than exercize price

b-2 Net loss = 360.6 – 358 = $2.6

b-3 rate of return = 2.6/5.6 = -46.42%

c-1 If strike price and call price are same at expiration t, there will be not returns, only loss will premium paid to buy put option. The answer is No.

c-2 Loss is the put option premium paid by $1.73.

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