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FIN 516 Week 3 Homework

Problem 20-6 on Call Options Based on Chapter 20

You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time.

a) If the stock is trading at $55 in 3 months, what will be the payoff of the call?

b) If the stock is trading at $35 in 3 months, what will be the payoff of the call?

c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration.

Problem 20-8 on Put Options Based on Chapter 20

You own a put option on Ford stock with a strike price of $10. The option will expire in exactly 6 months’ time.

a) If the stock is trading at $8 in 6 months, what will be the payoff of the put?

b) If the stock is trading at $23 in 6 months, what will be the payoff of the put?

c) Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration.

Problem 20-11 on Return on Options Based on Chapter 20

Consider the September 2012 IBM call and put options in Problem 20-3. Ignoring any interest you might earn over the remaining few days’ life of the options, consider the following.

a) Compute the break-even IBM stock price for each option (i.e., the stock price at which your total profit from buying and then exercising the option would be 0).

b) Which call option is most likely to have a return of −100%?

c) If IBM’s stock price is $216 on the expiration day, which option will have the highest return?

Problem 21-12 on Option Valuation Using the Black Scholes Model Based on Chapter 21

Rebecca is interested in purchasing a European call on a hot new stock—Up, Inc. The call has a strike price of $100 and expires in 90 days. The current price of Up stock is $120, and the stock has a standard deviation of 40% per year. The risk-free...

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FIN 516 Week 3 Homework

Problem 20-6 on Call Options Based on Chapter 20

You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time.

a) If the stock is trading at $55 in 3 months, what will be the payoff of the call?

b) If the stock is trading at $35 in 3 months, what will be the payoff of the call?

c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration.

Problem 20-8 on Put Options Based on Chapter 20

You own a put option on Ford stock with a strike price of $10. The option will expire in exactly 6 months’ time.

a) If the stock is trading at $8 in 6 months, what will be the payoff of the put?

b) If the stock is trading at $23 in 6 months, what will be the payoff of the put?

c) Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration.

Problem 20-11 on Return on Options Based on Chapter 20

Consider the September 2012 IBM call and put options in Problem 20-3. Ignoring any interest you might earn over the remaining few days’ life of the options, consider the following.

a) Compute the break-even IBM stock price for each option (i.e., the stock price at which your total profit from buying and then exercising the option would be 0).

b) Which call option is most likely to have a return of −100%?

c) If IBM’s stock price is $216 on the expiration day, which option will have the highest return?

Problem 21-12 on Option Valuation Using the Black Scholes Model Based on Chapter 21

Rebecca is interested in purchasing a European call on a hot new stock—Up, Inc. The call has a strike price of $100 and expires in 90 days. The current price of Up stock is $120, and the stock has a standard deviation of 40% per year. The risk-free...

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