fin 516 homework week 2 Essay

2011 Words Aug 5th, 2014 9 Pages
Problem 20-6 on Call Options based on Chapter 20
(Excel file included)
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time.
a. If the stock is trading at $55 in 3 months, what will be the payoff of the call?
• Payoff-max=(50-s) = max (55-40)=15 the Ford owner will gain $15
b. If the stock is trading at $35 in 3 months, what will be the payoff of the call?
• Payoff-max=(35-s) = max (35-40)=-5 the owners will gain $-5
c. Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration.
Payoff Stock Price
15 55
-5

Problem 20-8 on Put Options based on Chapter 20
(Excel file included)
You own a put
…show more content…
c. What is your total profit or loss after 10 days? Have you been protected against a rise in oil prices?
• Summing the daily profit/loss amount, the total is a gain of $250,000. This gain offsets your increase in cost form the overall $2.50 increase in oil prices over the 10 days, which increase your total cost of oil by 100,000*$2.50=$250,000
d. What is the largest cumulative loss you will experience over the 10-day period? In what case might this be a problem?
• After the second day, you have lost a total of $250,000. It would be liquidated on day 2, it would be a loss and you will have to pay the higher cost of oil on the 10th day.
Problem 21-12 on Option Valuation using the Black Scholes model based on Chapter 21
Rebecca is interested in purchasing a European call on a hot new stock—Up, Inc. The call has a strike price of $100 and expires in 90 days. The current price of Up stock is $120, and the stock has a standard deviation of 40% per year. The risk-free interest rate is 6.18% per year.
a. Using the Black-Scholes formula, compute the price of the call.
• 23.33
b. Use put-call parity to compute the price of the put with the same strike and expiration date.
• 1.81

Problem 30-14 on Swaps based on Chapter 30
Your firm needs to raise $100 million in funds. You can borrow

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