Question

In mid-May, there are two outstanding call option contracts available on the stock of ARB Co.: Call # Exercise Price Expiration Date Market Price August 19 1 $54 $8.10 2 60 August 19 3.20 a. Assuming that you form a portfolio consisting of one Call #1 held long and two Calls #2 held short, complete the following table showing your intermediate steps. In calculating net profit, be sure to include the net initial cost of the options. Do not round intermediate calculations. Round your answers to the nearest cent. Use a minus sign to enter negative values, if any. If the answer is zero, enter "0" Price of ARB Profit on Call #1 Profit on Call #2 Net Profit on Stock at Expiration ($) Position Position Total Position 40 $ 45 $ $ $ 50 $ $ 55 $ 60 $ 65 $ $ $ 70 $ 75 $ $

Note: Select options are "low/high" and "limited/unlimited"

Answer 1

Icall option will exercise only colien the market price of underlying asset is more than LExercise_price [x] Net pay-off for a call option (If exercised) Market price - X - premium Raid. (from holderes point of view) - and = Premium+ X - market price. (from writer's point of view) Given portfolio - long one - short two call call #1 options. #2 options Price I Call #1 I long position - one X = $54 C=$ 8.1 call #2 Net short position - two Profit / L X= $60 llall c=$3.20 ($3.2012 =46:40) Portfolio ARB stock at expiry from ELI. + 40 45 50 55 60 (8.10) (8:10 8:10.) (7.10) (2.10 (2.90 7.90 119.90 LEI Indifferent 6.401.70 - 6.40 (1.70) .6.40 (170) 6.40 (0.70 ) 6.40 4.3 (3.60) (0.70) (16.40). 18.50) (23.60) (10.70) 65 20 75. E E = Exercise L=laps. -ver()

1 prafting Graph from table computed above + L portfolio O from less as so s s ó és ho 75 profit or 1 dl # Net e I 10 The First Break even point in (where will pay off from portfolio is "o") Net premium paid = 8.10-6.40= $ 1.70 | i. The first Break even point B 1 J = X of call #2t Net Premium W = $ 54 + $ 1,20 1 vit = deshto. $ 55.70 - second break even point (BEP) (We slet y be the second BEP then (2-54-8:10 ) + (120+6:40-2x) =0 64 30-X=0 X= 64.30. :. and Break even point = $64.30

I ② The from mantin um profit the portfolio that can = $ 4.30 earn © The portfolio will make sense when the price of underling share expected to rise up to a certain level but there is no rapid increase in share price ie low volatality # The holder of tobe to this position had unlimited liability because if share price rises the loss will rise in praportion. # The user of this position is betting on Low volatality #The holder has Limited liability for substantial price decline and lun-limited liability for substantial Price increase
a. Please refresh image posted for table

b. Grap "B" showing correct payoff diagram for given portfolio

First break even point is $55.70

Second break even point is $64.30

The maximum profit that can be earn is $4.30

C. The user betting on low volatility

The holder has limited liability when price decline and unlimited liability when price increase substantially