Question

1 .Today’s price of Proctor and Gamble (PG) is $120 per share. You are mildly bearish about PG in the near future. To implement your view, you decide to purchase a bear put spread with six months until maturity. An option dealer provides you quotes on six-month PG options. For a put option with a strike of $115, the dealer quotes you a price of $6.01. For a put option with a strike of $95, the dealer quotes you a price of $0.82. The c.c. risk-free rate is zero. What is the profit to the bear put spread if PG trades at $100 per share in six months? At what price would yo breakeven?

Profit to short straddle of 41.36 (which is incorrect) and a breakeven of 109.89 (which was the right answer)

2. Today’s price of Delta is $150 per share. You are neither bullish nor bearish about Delta, but you believe that the share price will not move by a lot in the near future. To implement your view, you decide to sell a straddle with one month until maturity. An option dealer provides you quotes on one-month Delta options. For a call option with a strike of $150, the dealer quotes you a price of $4.32. For a put option with a strike of $150, the dealer quotes you a price of $4.32. The c.c. risk-free rate is zero. What is the profit to the short straddle if Delta trades at $200 per share in one month?

I got 41.36

There are 2 breakevens, what is the high?

158.64

What is the low?

141.36

*Note that I don't think these answers are correct, with the exception of the breakeven in Q1 - I know I formulated that one correctly.

Other than that, that is all the information that I have for the questions. Thanks for the help! Definitely a challenging class. Please use as much explanation as you can!

Answer 1

1. Price of Proctor & Gamble (P6) = 820 1. Strategy Bear Put Spread. lah-option I Put-option- strike price = $115 struke price = $95. Price of put option = 86.01 Price of put option = $0.82. • skaks price of Put-opkiem -I > Strike price of Put opkon - According to bege put spread. The investor should take long posikion on Put-option - I and Short position on put-option - II whom shock price = $100 Prosit of Puth-option - I - (long position] → Pay off = (stike price - Stock price since the strike price - 115-100 Shock price Payo = 15 Post option is exorciso : - Prafik on long poškion on put, option = 15-60) - $8.99 . . . .

. . . . . . . . • Profit on put-option-I (Short position] • Here shock price = $100 Strike price = $95... • Since Strike price < Stork price, the put options worthless. Pay off of this put option = 0 Prosit = Pay off + Price of put ophion. = 0 +0.82 . Profik = $0.82 T Total profit = 0.82 +8.99 : Total profit = 89.81] . . . . . . . . Break-even stock price. Beak-put Strategy . Break even price . Project . . KI . . .

< 2. Calloption < < Extrase price of all option = $150. Price of all option = $422. position > Shork Put option Exokaise pile of Put ophon = $150 . . . . price of put option = $432 Position - Short . . - - Pay off for all option for stock pric = $200 Stock price > Strike price The call option will be exercised. Pay of for short position =-(stock pnie - Strike price) -- (200 - 150 = - $50 profit for Short position = Payoff + Bike of Call option = - $50 + 4632 -- $45.68 - ce

From the profit diagram of bear put spread the break. • even p stock price lee between two exprese prices. .- Profit of this strategy when stock price lies between two : excluse price is (Righth strit stake price of ) - (Shock )_/Price of long )+ Price of shorts •Prosit = Long put option) - price / - puh option to put op hond - At break even Skörk price, profitez o 0= 115-s-6001+0.82 S=115-6:02+0.82 Is=$109.81 .- Thekefore the per breek-ever stock price is $109.81 o . .

. . . Port for Put option Pata 14 Stock price - 8200 Hues, (stock prie) > CExokose poice of put opbor) Therefore, Put option is voor khloss 1. Pay off=0 • Profi - Pay off+ (Price of put-option) Potit - 0 + $4.32 1 lprofit = 8h32 Total profit = - $45.68+84.32 Kohal profit = -$41.36] • Break-even stock-price for Short-Skrangle st Straddle . Strategy For Low-break-even shock price, the formula is. Stock-Strike 1 the strike price of the Price of her o e shock price - I put ophon Coloring Po 0 = S-150 +4.32 +4.32 $=$41.36

• . . for high-break evon price. o- /Strike price of) 1 Stock 1+1 Price of Call Price of . Call option 2 price) Coption that options Stock-price = 150 +4.32+2.32 Stock-price = $158.64 ] . . • 1 . . . . . . . . . . • . • . •