Question

Problem #1 Imagine that the price of a given stock at time t is given with + (1 - wHp - No100), where R = 1,w = 0.5, Hp = 100,000 = 1. i) Let D, = 200 and N, = 100. What is the price of the stock in this case? ii) Now imagine that an investor purchases a call option that allows her to acquire this stock at time t + 1 for K = 150. Will this investors exercise this option when De+1 = 300 and Nt+1 = 100? What is the intrinsic value of this option? iii) What is the rate of return from holding the option from period t to period t+1 if the investors paid P. = 20 for the option at time t? iv) Would the investor be better off is she held a put option from period t to t+1 with a strike price of K = 150?

Answer 1

t = 0.5 e (w PL + (1-w) MD-N 6100) ginen R=1 w Mo=100 6 100 = ly = 110.5x200 +(1-0.5) 100 - 100x! ) [ 100 + 50 -100) =( 50. 12 i ginen KF 150. This is the strike pevce. The price at which the person can exereise the option V o if a +=300; NE=100 PL = 1/ 0.5x 300 +0,5X100 - 100 XN) el 150+ 50-100 2018 call option gives the person

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 THU 24 25 26 27 28 29 30 but not the Obligaties the night to buy the option. Because the market price lower than the shike price, 1 person will not exercise the option. 12. Because the option is not excercised at time to the shinath hits inhiasie value is zero. 1 hitrinsic value gives the amount by which an option is in the money.

AUG FRI 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 (iv) the investors If the investor held a fut obrion, it me would mean that the investor had the right but nol- the obligation to sell the underlying commodity Carexerise the option . The strike price but market would be 150. price would be 50 The investor will definitely heakce a profit on exercling the option T She will be better off