Question

Problem-03a: You sell (short position) 12 European call option contracts on ZZZ stock at the premium of $8.5. The exercise price of the option is $100, the maturity of the options is 3-month, and the stock currently is trading at $98. i. What is the payoff of your position if the stock price at maturity is $105? Show the result numerically. ii. Repeat i. for the stock price at maturity of $93.

Problem-03b: For problem-03a: i. What is the profit (P/L) of your position if the stock price at maturity is $105 or $93? For each case show the results numerically? ii. What is the Break Even Point (BEP) of your investment? (It is easier to find the BEP on one option, rather than for the entire value of the investment!) [For the following Excel exercise, you should use one option to one underlying in calculating and graphing, rather than using entire value of the investment.]

Problem-03c (Excel Exercise): For problems -03a and -03b, assume that ZZZ stock price at maturity will take values between $75 and $130 in increment of $5. i. Will the call (option) buyer exercise the option? Give only NO, INDIFFERENT, YES answer. This is a qualitative question? ii. At each likely underlying price at maturity, calculate and show the Payoff and P/L numbers using formulas (in Excel!). Note that stock price of ZZZ ranges from $75 of $130 in increments of $5. iii. Graph your numbers found in ii. iv. Integrate numbers calculated in Problem-03a i, ii, and Problem-03b i, ii. (This means put these numbers into the graph).

Answer 1