Problem POS-71 Today is May 3 (\"time 0\"). The price of XYZ stock is $29. The f

Question

Problem POS-71 Today is May 3 ("time 0"). The price of XYZ stock is $29. The following options on XY stock are given Security Strike Price Expiration current price Put Call $25.00 $35.00 November 18 $2.00 November 18 $2.51 The stock is not expected to pay dividends between now and Nov. 18 Consider the following position: . Buy one share of stock, e buy one 25-strike put, and sell (take a short position in) one 35-strike call Questions: (a) Prepare a numerical table showing the payoff and the profit of the above position a expiration ('"time 7), on November 18, under different scenarios. (See guidance in separate document) (b) Use the numerical table to draw graphs for the position's payoff at expiration and prof at expiration. (See guidance in a separate document.) (c) Complete: The profit at expiration is negative if the stock price at that time is in th range The profit is positive if the stock price is in the range Complete the following algebraic table showing the payoff of this position at expiration (d) under different scenarios. Position Time-0 Value (payoff) at expiration Security Strike (Units) value Sr2525

Explanation / Answer

CURRENT STOCK PRICE = $29 PUT OPTION STOCK PRICE = $25 CALL OPTION STOCK PRICE = $35 EXPIRY DATE NOVEMBER' 18 PUT OPTION PREMIUM = $2 CALL OPTION PREMIUM = $2.51 If buy one share of stock and one put option and sell one call option. The net position as on expiry date is as follows Particulars 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 a) Profit or loss against stock Current price 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Purchase price 29 29 29 29 29 29 29 29 29 29 29 29 29 29 29 loss -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 b) Profit or loss against put option EXCISE PRICE 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 PUT OPTION STRIKE PRICE 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 profit/loss 3 2 1 option not excised option not excised option not excised option not excised option not excised option not excised option not excised option not excised option not excised option not excised option not excised option not excised Less: put premium 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Net profit/ loss 1 0 -1 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 c) Profit or loss against call option EXCISE PRICE 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 CALL OPTION STRIKE PRICE 35 35 35 35 35 35 35 35 35 35 35 35 35 35 35 profit/loss -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 Premium Recieved 2.51 2.51 2.51 2.51 2.51 2.51 2.51 2.51 2.51 2.51 2.51 2.51 2.51 2.51 2.51 Net profit/ loss -15.51 -14.51 -13.51 -12.51 -11.51 -10.51 -9.51 -8.51 -7.51 -6.51 -5.51 -4.51 -3.51 -2.51 -2.51 D) Total net profit or loss (a+b+c) -21.51 -20.51 -19.51 -18.51 -16.51 -14.51 -12.51 -10.51 -8.51 -6.51 -4.51 -2.51 -0.51 1.49 2.49

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