Question

questions 14-17.

(that is comparing expected price of the bond 6months in the future, 1 yr in the future, 1.5 yrs in the futur so on, till maturity 10203 D) 1056.4 as one moves ahead in time and year. The bond has 3 yeals Io 10096 81045 21. h. Question the "expected price of the bondin the future" 2 A stock price is currently $40. Supposeit is known that at the end of the month, it will be either $42 or $38 The stee rates 8% per annum with continuous compounding, what is the value BGes down Could go up or downD] None of the above A/ Goes Up of a 1month call with a strike of $40? if the strike price was below $40 (all else staying the same) D) none of the above 65 B$1.13 CS265 Dj None of the above 13 In Qvestion 12 the price of the call would B) rise could rise or fall 24 you buy an at the moneycal or$3 and an at the-money put for $4, when the stock price of Avalon is $1s0, you make a profit when the stock price is A) Above $157 8) Below $145 C)Above $157 and Below $145 C) All of the above 5. An investor invests in the strategy of Question 14 when he believes that Avalon's price will A)Go up 8)Go down Stay in a range D) May go up or down A stock price is currently at $50.t is known that at the end of 6 months it will be either $55 or $45. The risk freerate is 10% per annum with continuous continuous compounding. What is the value of a 6 month put option with strike Wha price of $50? B$1.07 C)$1.16 D) $1.32 17 You purchased a Syear annual interest coupon bond one year ago. Its one year ago, its coupon interest rate was 6% and its par purchased the bond, the yield to maturity was 4%, if you sold the bond after maturity had changed to 3%, your annual total rate of receiving the first interest payment and the bond's yield to maturity return on holding the bond for that year would have been in the range A) &OI-9.00 % Q&01-100% B) 7.01-8.00 % D) 5.00-6.00% Henry sels a call and Alice sells a put on the same stock. ame strike price. The maximum potential loss for Henry isetimes greater, sometimes lower than A) Greater than call and put sold by Henry and Alice have the the maximum potential loss for Alice B) Lower than greater, C) Equal to D) 19. Asha buays a cal with strike $85 and the $130 strike costs $8. Asha's 10 on S&P-500. The $85 strike call costs $10 while and sells a call with strike $1 s maximum profit on this strategy is C) $25 Al iefinity B1 $27 D) $23 t y in Question 19, she believes that S&P-50o 8oing up Bj has limited potential of going down D) none of the above potenta C) has limited potential of going up 21 At the opening of the strike $1050 is trading market, a call on Google, with strike $1050, is trading at $80, Both while a put on Google with a Soogle with at $60. Both call and put have the same 5 year expiry. it, at the close of put o

Answer 1

Q - 14

A long put and long call gives you profit only if S - K > C + P or K - S > C + P; K = 150, C = 3 ; P = 4

Hence, S > 157 or S < 143

Hence the correct answer is option A)

Q - 15

The correct answer is option D)

An investor takes a long position in put as well as call with the same strike, only if he / she believes the stock price will fluctuate in either direction.

Q - 16

u = 55/50 = 1.1; d = 45/50 = 0.9; r = 10%; t = 6 months = 0.5 year; K = 50

Hence, p = (e^rt - d) / (u - d) = (e^{0.1 x 0.5} - 0.9) / (1.1 - 0.9) =  0.7564

Pu = max (K - Su, 0) = max (50 - 55, 0) = 0

Pd = max (K - Sd, 0) = max (50 - 45, 0) = 5

Hence, value of Put option today = e^-rt x {p x Pu + (1 - p) x Pd} = e^{-0.1 x 0.5} x {0.7564 x 0 + (1 - 0.7564) x 5} = 1.16

Hence the correct answer is option C)

Q - 17

Price of a bond, P = - PV (Rate, period, PMT, FV)

At the time of purchase of the bond, P₀ = - PV(4%,5,6%*1000,1000) = $1,089.04

At the time of sale, P₁ = - PV(3%,4,6%*1000,1000) = $1,111.51

Return = (P₁ + C - P₀) / P₀ = ($1,111.51 + 60 - 1,089.04) / 1,089.04 = 7.57%

The correct answer is option B)