a) An investor looks at market reports and sees you
can but Rio Tinto call option over 1000 shares at $8 with a strike
price of $88 and a 6 month expiry. After 4 months the physical
price goes to $100. What can the investor do to achieve the best
outcome? With aid of a diagram identify and quantify the
gains/losses of the writer and buyer?
b)Using a diagram, explain how the gains and losses of both the
buyers and sellers or futures contracts differ from buyers and
sellers of call options.
BUYER OF CALL: | |||||||||
Strike Price=$88 | |||||||||
Assume Price at Settlement =S | |||||||||
Payoff =Max. ((S-88),0) | |||||||||
Profit =Payoff-$8 | |||||||||
At $100, Payoff =(100-88)=$12 | |||||||||
Profit =$12-$8=$4 | |||||||||
Total Profit =$4000 | |||||||||
WRITER OF CALL: | |||||||||
Strike Price=$88 | |||||||||
Assume Price at Settlement =S | |||||||||
The writer will receive $8 | |||||||||
Payoff =Min. ((88-S),0) | |||||||||
Profit =Payoff+$8 | |||||||||
At $100, Payoff =(88-100)=-$12 | |||||||||
LOSS =-$12+$8=-$4 | |||||||||
Total Loss =$4000 | |||||||||
A | B=A-8 | C=B*1000 | |||||||
Price at Settlement | Payoff for Call Buyer | Profit/(Loss )per share | Total Profit/(Loss) | ||||||
$80 | $0 | ($8) | ($8,000) | ||||||
$82 | $0 | ($8) | ($8,000) | ||||||
$84 | $0 | ($8) | ($8,000) | ||||||
$86 | $0 | ($8) | ($8,000) | ||||||
$88 | $0 | ($8) | ($8,000) | ||||||
$90 | $2 | ($6) | ($6,000) | ||||||
$92 | $4 | ($4) | ($4,000) | ||||||
$94 | $6 | ($2) | ($2,000) | ||||||
$96 | $8 | $0 | $0 | ||||||
$98 | $10 | $2 | $2,000 | ||||||
$100 | $12 | $4 | $4,000 | ||||||
$102 | $14 | $6 | $6,000 | ||||||
A | B=A+8 | C=B*1000 | |||||||
Price at Settlement | Payoff for Call Writer | Profit/(Loss )per share | Total Profit/(Loss) | ||||||
$80 | $0 | $8 | $8,000 | ||||||
$82 | $0 | $8 | $8,000 | ||||||
$84 | $0 | $8 | $8,000 | ||||||
$86 | $0 | $8 | $8,000 | ||||||
$88 | $0 | $8 | $8,000 | ||||||
$90 | ($2) | $6 | $6,000 | ||||||
$92 | ($4) | $4 | $4,000 | ||||||
$94 | ($6) | $2 | $2,000 | ||||||
$96 | ($8) | $0 | $0 | ||||||
$98 | ($10) | ($2) | ($2,000) | ||||||
$100 | ($12) | ($4) | ($4,000) | ||||||
$102 | ($14) | ($6) | ($6,000) | ||||||
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a) An investor looks at market reports and sees you can but Rio Tinto call option...