Question

THANA Exercise 5 (15 points) The common stock of the C.A.L.L. Corporation has been trading in a rowe per share for months, and you believe it is going to stay in that range for the ne price of a 3-month put option with an exercise price of $120 is $7.99. in a narrow range o d 5120 Say in that range for the next 3 months. The year, what must be the price of a 3-month call a. If the risk-free interest rate is 7% per year, what must be the pre option on C.A.L.L. stock at an exercise price of $120 if L. stock at an exercise price of $120 if it is at the money? (The stock pays no dividends.) b. What would be a simple options strategy using a p Simple options strategy using a put and a call to exploit your conviction about the stock price's future movement? c. What is the most money you can make on this position? d. How far can the stock price move in tar can the stock price move in either direction before you lose money e. How can you create a position involving a put, involving a put, a call, and riskless lending that would ve the same payoff structure as the stock at expiration? What is the net cost of establishing that position now?

Answer 1

a) P=12-120+120/(1.12)^1/4

^{P =8.648}

Price of 3 months at this call option at $120 =$8.648

b) Purchase a straddle : i.e both a put and a call on the stock. The total cost of the the straddle would be 12+8.648 = $20.648 and this is the amount by which the stock would have to move in both direction for getting profit on the call or put to cover the investment cost.

Accounting for time value,the stock would need to volatile in both direction by 20.648X(1.12)^1/4 =21.242

c) sell a call and put to realize premium income of 7.99+8.648=$16.638, if the stock ends up with$120 ,both options will be worthless.and profit will be $16.638, this is maximum possible profit since at any other stock price.

d) stock price can move either direction Plus or minus of $16.638 in both direction before the the investor profits becomes negative.

e) CF in three months 116.65