Question

XYZ stock is trading at $100. The effective 3 month interest rate r 190.3 month options on XYZ are trading at the following prices: Strike Price Call Price Put Price 95 100 105 7.05 4.11 2.14 6.88 1.81 3.86 1. Buy XYZ for S100 and buy a 95 strike put a) What is the cost for this position? b) Construct the payoff and profit graphs for this position c) Take the same amount of cash as in a) and instead buy the 95 strike call and invest the rest in 3 month zero coupon bonds yielding r d) Construct payoff and profit graphs for this position. e) How do your graphs from b) and d) compare? 2. Start with $0 in your account. a) Short XYZ at $100 and use some of the cash to buy a 95 strike call, investing the rest in zero coupon bonds b) Construct profit and payoff graphs for this position (ignoring stock borrow fees) c) Instead, borrow enough cash to buy the 95 strike put.

Answer 1