Question

It PusUNUI Cakcyl pom . 9) Consider the following example: SP = $75, UA = $95, and c 0 = $18. In this case, what is the long call's P&L? 10) Consider a call option with a strike price of $50 and premium of $6. At what underlying asset price does the long call position breakeven? 11) Consider a portfolio consisting of five long forwards with forward price of $40 and twelve long! calls with strike price of $22 and premium of $4. The underlying asset price is $35 at expiration. What is the portfolio's profit? 12) If the strike price is $50, the premium is $5, and the underlying asset price is $35 what is the long put's payoff? 13) What's an option? 14) What a call option? 15) What's a put option? 16) What's a forward contract? 17) What is the long and short position?

Answer 1

9)  Profit / Loss on a long call option = UA - SP - c0

where, UA = Price of underlying asset

SP = Strike Price

c0 = Premium paid

Profit / Loss on a long call option = $95 - $75 - $18 = $2

10) Break even price is where Profit / Loss on a long call option is Zero.

Hence, Price of underlying asset = Strike Price + Premium paid

Price of underlying asset = $ 50 + $ 6 = $ 56

11) Profit /  Loss on Forward contracts = Number of Forward contracts * (Strike Price - Forward Price)

= 5 * ( 35 - 40) = - $ 25 (Loss)

Profit /  Loss on Options = Number of Options * (Price of underlying asset - Strike Price - Premium paid)

Profit /  Loss on Options = 12 * (35 - 22 - 4) = $108 (Profit)

Portfolio position = $ 108 - $ 25 = $ 83 (Profit)

12) Long Put's payoff = Strike Price -Price of underlying asset - Premium paid

= $50 - $35 - $5 = $10

13) An option is a contract which gives holder a right without an obligation, to buy or sell an asset at an agreed price on or before a specified period of time. The price at which option can be exercised is known as strike price.

14) A call option is the option to buy an asset at an agreed price on or before a specified period of time.  

15) A put option is the option to sell an asset at an agreed price on or before a specified period of time.

16) Forward contract is a contract to buy or sell an asset at a specified price on a future date. They are non standardized and and individually tailored.

17) Long positions is where an investor buys a stock with the expectation that the price of stock will rise in the future. In short positions the expectation is that the stock will fall in value in the future. In short position the investor sells a share which he does not own.