Project #38397 - Finance/Investment

 

1.       The common stock of Sophia Enterprises serves as the underlying asset for the following derivative securities: ( 1) forward contracts, ( 2) European- style call options, and ( 3) European-style put options. a. Assuming that all Sophia derivatives expire at the same date in the future, complete a table similar to the following for each of the following contract positions: ( 1) A long position in a forward with a contract price of $ 50 ( 2) A long position in a call option with an exercise price of $ 50 and a front- end pre-mium expense of $ 5.20 Expiration Date Sophia Stock Price Expiration Date Derivative Payoff Initial Derivative Premium Net Profit 25 _____________ _____________ _____________ 30 _____________ _____________ _____________ 35 _____________ _____________ _____________ 40 _____________ _____________ _____________ 45 _____________ _____________ _____________ 50 _____________ _____________ _____________ 55 _____________ _____________ _____________ 60 _____________ _____________ _____________ 65 _____________ _____________ _____________ 70 _____________ _____________ _____________ 75 _____________ _____________ _____________ ( 3) A short position in a call option with an exercise price of $ 50 and a front- end premium receipt of $ 5.20 In calculating net profit, ignore the time differential between the initial derivative ex-pense or receipt and the terminal payoff.

 

b. Graph the net profit for each of the three derivative positions, using net profit on the vertical axis and Sophia’s expiration date stock price on the horizontal axis. Label the breakeven ( i. e., zero profit) point( s) on each graph.

 

c. Briefly describe the belief about the expiration date price of Sophia stock that an in-vestor using each of these three positions implicitly holds. 2. Refer once again to the derivative securities using Sophia common stock as an underlying asset discussed in Problem 1. a. Assuming that all Sophia derivatives expire at the same date in the future, complete a table similar to the following for each of the following contract positions: ( 1) A short position in a forward with a contract price of $ 50 ( 2) A long position in a put option with an exercise price of $ 50 and a front- end pre-mium expense of $ 3.23 ( 3) A short position in a put option with an exercise price of $ 50 and a front- end pre-mium receipt of $ 3.23 Expiration Date Sophia Stock Price Expiration Date Derivative Payoff Ini t ial Derivative Premium Net Prof it

 

25 ______________ ______________ ______________

 

30 ______________ ______________ ______________

 

35 ______________ ______________ ______________

 

 40 ______________ ______________ ______________

 

45 ______________ ______________ ______________

 

 50 ______________ ______________ ______________

 

 55 ______________ ______________ ______________

 

60 ______________ ______________ ______________

 

65 ______________ ______________ ______________

 

70 ______________ ______________ ______________

 

75 ______________ ______________ ______________

 

In calculating net profit, ignore the time differential between the initial derivative ex-pense or receipt and the terminal payoff. b. Graph the net profit for each of the three derivative positions, using net profit on the vertical axis and Sophia’s expiration date stock price on the horizontal axis. Label the breakeven ( i. e., zero profit) point( s) on each graph. c. Briefly describe the belief about the expiration date price of Sophia stock that an in-vestor using each of these three positions implicitly holds.

 

 

 

4. You strongly believe that the price of Breener Inc. stock will rise substantially from its current level of $ 137, and you are considering buying shares in the company. You cur-rently have $ 13,700 to invest. As an alternative to purchasing the stock itself, you are also considering buying call options on Breener stock that expire in three months and have an exercise price of $ 140. These call options cost $ 10 each. a. Compare and contrast the size of the potential payoff and the risk involved in each of these alternatives. b. Calculate the three- month rate of return on both strategies assuming that at the op-tion expiration date Breener’s stock price has ( 1) increased to $ 155 or ( 2) decreased to $ 135. c. At what stock price level will the person who sells you the Breener call option break even? Can you determine the maximum loss that the call option seller may suffer, as-suming that he does not already own Breener stock?

 

5. The common stock of Company XYZ is currently trading at a price of $ 42. Both a put and a call option are available for XYZ stock, each having an exercise price of $ 40 and an expiration date in exactly six months. The current market prices for the put and call are $ 1.45 and $ 3.90, respectively. The risk- free holding period return for the next six months is 4 percent, which corresponds to an 8 percent annual rate. a. For each possible stock price in the following sequence, calculate the expiration date payoffs ( net of the initial purchase price) for the following positions: ( 1) buy one XYZ call option, and ( 2) short one XYZ call option: 20, 25, 30, 35, 40, 45, 50, 55, 60 Draw a graph of these payoff relationships, using net profit on the vertical axis and po-tential expiration date stock price on the horizontal axis. Be sure to specify the prices at which these respective positions will break even ( i. e., produce a net profit of zero).

 

b. Using the same potential stock prices as in Part a, calculate the expiration date payoffs and profits ( net of the initial purchase price) for the following positions: ( 1) buy one XYZ put option, and ( 2) short one XYZ put option. Draw a graph of these relation-ships, labeling the prices at which these investments will break even. c. Determine whether the $ 2.45 difference in the market prices between the call and put options is consistent with the put- call parity relationship for European- style contracts.

 

Subject Business
Due By (Pacific Time) 08/23/2014 06:54 pm
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