FNCE20005 Chapter Notes - Chapter 18: Option Contract, Put Option, Capital Structure

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orangemole587

29 Jun 2020

School

University of Melbourne

Department

Finance

Course

FNCE20005

Professor

Sean Pinder

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Document Summary

Call option = right to buy an underlying asset at a fixed price. Put option = right to sell an underlying asset at a fixed price. Exercise/strike price = fixed price at which an underlying asset can be traded. Intrinsic value = value of an option if exercised immediately. Time value = value of an option in excess of its intrinsic value. Put-call parity = relationship that exists between the price of a call option and the price of the corresponding put option. Adjustment to be made in the event of a change in capital structure. Adjustment to be made in the event of a dividend payment. Payoff structure = future cash flows of a contract. Current share price - higher current share price --> higher call price. Exercise price - lower exercise price --> higher call price. Term to expiry - longer term to expiry --> higher call price.

Related Questions

Problem 2

The writer of a regular exchange-listed put-option on a stock:

Has the right to buy 100 shares of the underlying stock at the market price.

Has the right to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the exercise price.

Has the obligation to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the market price.

please really need some help with these questions

Problem 3

Suppose an investor have a put option. What will happen if the stock price on the exercise date is below the exercise price?

A. The seller will need to deliver stock to the owner of the option. B. The seller will be obliged to buy stock from the owner of the option. C. The owner will not exercise his option.
D. The option will extend for nine more months.
E. None of the above options.

Problem 5

Suppose an investor sells one share of stock and buys a call option on the stock. What will be the value of her investment on the final exercise date if the stock price is above the exercise price? (Ignore transaction costs.)

A. The value of two shares of stock.
B. The value of one share of stock plus the exercise price. C. The exercise price.
D. The value of one share of stock minus the exercise price.

E. None of the above options.

Problem 9

All else equal, as the underlying stock price decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

Problem 10

All else equal, as the underlying stock volatility decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

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The spot price of an asset is $2,500. The European call option on the asset with strike price $2,400 that expires in 6 months is traded at $225. The asset will pay a dividend in 3 months of $200. The default free 3-month pure discount bond is traded at $98 and the 6-month pure discount bond is traded at $95, both with face value $100. There is also a forward contract and a European put option on the asset with the same strike price as the call, both expiring in 6 months.

Answer the following:

(a) What should the forward price be and why?

(b) What should the price of the put option be?

(d) Suppose that there are no 6-month pure discount bonds. How can you borrow synthetically over 6 months and at what interest rate if the put option is traded at $205?

(e) Plot the profit diagram and compute lhe break-even point(s) of the strategy that goes long the asset and goes short two call options on the asset.

(f) PIot the payoff diagram ofthe strategy that goes long one call and one put option on the asset. This strategy can be considered a speculation on what?

1. A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple Beverage is $24.25. The put option price is $7.75

a. Is this option an at-the-money option, out-of-the-money option, or in-the-money option?

b. Compute the intrinsic value and the time value of this option.

2. You write a put option with X = $50 and buy a put with X = $60. One is selling for $3 and another is selling for $8. The options are on the same stock and have the same maturity date.

a. What is the break-even point for this strategy?

b. How much is profit/loss when stock price is $55?

3. George Evans is currently bullish on the common stock of the Franklin Corporation. Franklinâs current price is $75 and a 3-month call with an exercise price of $75 is selling for $4. Ignore commissions and taxes. If Evans purchases the call and the price of the stock increases to $81 after 3 months, what kind of rate of return will he make?

4. You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date when IBM stock sells for $113 per share. What will be your realized profit/loss on the investment?

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FNCE20005 Chapter Notes - Chapter 18: Option Contract, Put Option, Capital Structure

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