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    20 Amocanebibh

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    The document discusses put-call parity and how it can be used to calculate the price of a put option given the price of a call option. It also discusses using a straddle strategy by buying a call and put together to profit from an expected large move in the stock price without knowing the direction. Another topic covered is using put-call parity to calculate the risk-free interest rate from option prices.

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    20 Amocanebibh

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    lika77678
    20 views3 pages
    The document discusses put-call parity and how it can be used to calculate the price of a put option given the price of a call option. It also discusses using a straddle strategy by buying a call and put together to profit from an expected large move in the stock price without knowing the direction. Another topic covered is using put-call parity to calculate the risk-free interest rate from option prices.

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    The document discusses put-call parity and how it can be used to calculate the price of a put option given the price of a call option. It also discusses using a straddle strategy by buying a call and put together to profit from an expected large move in the stock price without knowing the direction. Another topic covered is using put-call parity to calculate the risk-free interest rate from option prices.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    20 views3 pages

    20 Amocanebibh

    Uploaded by

    lika77678
    The document discusses put-call parity and how it can be used to calculate the price of a put option given the price of a call option. It also discusses using a straddle strategy by buying a call and put together to profit from an expected large move in the stock price without knowing the direction. Another topic covered is using put-call parity to calculate the risk-free interest rate from option prices.

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    7) The common stock of the P.U.T.T.

    Corporation has been trading in a narrow price range


    for the past month, but you are convinced it is going to break far out of that range in the
    next six months. You do not know whether it will go up or down, however. The current price
    of the stock is $100 per share, and the price of a six-month call option at an exercise price of
    $100 is $10.

    a. If the semiannual risk-free interest rate is 3%, what must be the price of a six-month put
    option on P.U.T.T. stock at an exercise price of $100? (The stock pays no dividends.)

    b. What would be a simple options strategy to exploit your conviction about the stock
    price’s future movements? How far would it have to move in either direction for you to
    make a profit on your initial investment?

    a. From put–call parity:

    = $8.53

    b. total cost of the straddle is 10 + 8.53 = 18.53

    23) Assume a stock has a value of $100. The stock is expected to pay a dividend of $2 per
    share at year-end. An at-the-money European-style put option with one-year expiration sells
    for $7. If the annual interest rate is 5%, what must be the price of a 1-year at-the-money
    European call option on the stock?

    The price of the call is $9.86. Using put–call parity, solve for the call option’s price:

    24) You buy a share of stock, write a 1-year call option with X = $10, and buy a 1-year put
    option with X = $10. Your net outlay to establish the entire portfolio is $9.50.

    b. What must be the risk-free interest rate? The stock pays no dividends.
    What is the break-even point for this strategy? Is the investor bullish or bearish on the
    stock?

    A bullish investor believes stock prices will rise, so they want to buy to benefit from the
    price increase. Bearish investors believe prices will drop, so they sell, buy, then sell, and take
    advantage of them.

    30) Netflux is selling for $100 a share. A Netflux call option with one month until expiration
    and an exercise price of $105 sells for $2 while a put with the same strike and expiration
    sells for $6.94.

    What must be the market price of a zero-coupon bond with face value $105 and 1-month
    maturity? What is the risk-free interest rate expressed as an effective annual yield?

    1. According to put–call parity (assuming no dividends), the present value of a payment


    of $105 can be calculated using the options with 1 month expiration and exercise price
    of $105. Annualizing generates a risk-free rate of 0.8%:

    PV($105) = $100 + $6.94 − $2 =$104.93

    A call option gives its holder the right to purchase an asset for a specified price, called the
    exercise or strike price.

    A put option gives its holder the right to sell an asset for a specified exercise or strike price
    on or before some expiration date.

    Value at expiration = Stock price − Exercise price


    Put value at expiration = Exercise price − Stock price

    Profit = Final value − Original investment


    A long straddle involves buying both a call and a put option with the same strike price and
    expiration date, while a short straddle involves selling both a call and a put option with the
    same strike price and expiration date.
     Any option that has an intrinsic value is classified as 'In the Money' (ITM) option.
     Any option that does not have an intrinsic value is classified as 'Out of the Money'
    (OTM) option.
     If the strike price is almost equal to spot price(current price), then the option is
    considered as 'At the money' (ATM) option.

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