Question

1. Jim sold 20 put option contracts on XYZ stock with an exercise price of $35.5 and an option price of $2.30. Today, the option expires and the underlying stock is selling for $34.30 a share. What is your total profit or loss on this investment? 2 ABC CO just paid a $1.20 annual dividend. The company has a policy whereby the dividend increases by 2.5 % annually. You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another three years. If you desire a 10% rate of return, how much should you expect to pay for 100 shares when you can afford to buy this stock? Ignore trading costs.

Answer 1

1. Loss on this investment =(Exercise Price - Share Price -Option Price) =(35.50-34.30-2.30) =-1.10
Total Loss =Number of Put Option contracts * Loss =-1.10*20 = -22.0

2. Price of The stock today = Dividend*(1+Growth)/Required rate =1.20*(1+2.5%)/10% =12.30

Price of stock after 3 years = Price Today*(1+Growth)^3 =12.30*(1+2.5%)^3 =13.2458

Amount for 100 shares = 100*13.2458 = 1324.58