Question

Question 8 is worth 2 marks Ms. Taylor had taken a short position in 1,000 shares of the common stock of Toronto Packaging Ltd. at the price of S40 per share in the past. Today the price per share is $30 which provides her gains in her short position. She is concerned that the price of the stock may go higher in the future, which will adversely affect her capital gains in the short position. Suppose she buys today 10 calls on the common stock of Toronto Packaging Ltd. and each call is American and has the premium of $1.2 per share, the exercise price of $37 per share, size of 100 share and option period of six months. 8. Suppose after three months today, the spot price per share of the stock, denoted by St happens to be: ( i) St=$25 (ii) St= $35 (iii) St=$45 (iv) St $55 Ignore the time value of money in your calculations and find profit(loss) from the total portfolio position of Ms. Taylor in the stock at each of four levels of S

Answer 1

Profit on short position = number of shares * (selling price per share - current price per share)

Profit of long call options = (Max[S-X, 0] - P) * number of shares per call * number of calls

S = underlying price at expiry,

X = strike price

P = premium paid or received (long options involve paying premium, and short options receive premium)

Total portfolio profit =  Profit on short position + Profit of long call options

C D Profit А 1 Stock price at 2 expiry $25 Long Call Short ($37) Position Total Profit ($1,200) $15,000 $13,800 ($1,200) $5,000 $3,800 $6,800 ($5,000) $1,800 $16,800 ($15,000) $1,800

ДА Profit Stock price at 2 expiry 3 25 4 35 5 45 6 55 Long Call ($37) =(MAX(A3-37,0)-1.2)*100*10 =(MAX(A4-37,0)-1.2) *100*10 =(MAX(A5-37,0)-1.2)*100*10 =MAX(A6-37,0)-1.2)*100*10 Short Position =1000*(40-A3) =1000*(40-44) =1000*(40-A5) =1000*(40-46) Total Profit =B3+C3 =B4+C4 =B5+C5 =B6+C6