Show work in excel format please! 4. The price of a stock is $51. You can buy a

Question

Show work in excel format please! 4. The price of a stock is $51. You can buy a six-month call at $50 for $S or a six-month put at $50 for $2 a) What is the intrinsic value of the call? b) What is the intrinsic value of the put? c) What is the time premium paid for the call d) What is the time premium paid for the put? e) If the price of the stock falls, what happens to the value of the put? f) What is the maximum you could lose by selling the call covered? g) What is the maximum possible profit if you sell the stock short? After six months, the price of the stock is $58. h) What is the value of the call? i) What is the profit or loss from buying the put? j) If you had sold the stock short six months earlier, what would your profit or loss be? k) If you had sold the call covered, what would your profit or loss be?

Explanation / Answer

a)

intrinsic value of call=max(S-X,0)=max(51-50,0)=1

c)

time value of call=premium-intrinsic value=5-1=4

b)

intrinsic value of put=max(X-S,0)=max(50-51,0)=0

d)

time value of put=premium-intrinsic value=2-0=2

e)

Put is inversely proportional to the stock price.So if price of stock falls, put premium would increase or put value would increase

f)

Selling call covered is owning the stock and selling the call

So, maximum loss would be when stock price falls to zero then loss=51-5=46

g)

Maximum profit occurs when stock price is zero=51-0=51

h)

value of call=max(58-50,0)=8

i)

put would be worthless so premium is the loss..loss of 2

j)

loss as stock has risen=58-51=7

k)

the call would be exercised by the buyer and i would have to incur a loss of 58-50=8 but i had received premium of 5.so, net loss=3 on option

But profit on stock=58-51=7

hence, total profit=7-3=4

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