This study source was downloaded by 100000813270448 from CourseHero com on 04 25 2022 17 47 29 GMT 05 00 https www coursehero com file 83382168 workshop 3 Solutionpdf 932N1 FinancialDerivatives Workshop31 JC5 14 ThefollowingoptionpricesaregivenforSunstarInc whosestockpriceequals 50 00 StrikePriceCallPricePutPrice455 501 00501 501 50551 005 55Computetheintrinsicvalueofeachoftheseoptionsandidentifywhethertheyarein the money at the money orout of the money 2 JC15 6 ThepriceofaputoptionwithstrikeK1 20is 0 75andthepriceofaputoptionwithstrikeK2 25is 3 50 a Whatisabullishverticalspread b DrawabullishverticalspreadbytradingputoptionswithstrikepricesK2 20andK4 25 Solution a Averticalspreadisanoptiontradingstrategythatinvolvesbuyinganoptionandsimultaneouslysellinganoptionofthesametype sothatthetradeinvolvesbothcallsorbothputs butwithadi erentstrikeprice wherebothoptionshavethesameunderlyingsecurityandthesamedateofmaturity Thestrategygivesa atpro t orloss lineforstockpricesatexpirationthatareabovethehigherstrikepriceorbelowthelowerstrikeprice Abullishverticalspreadgivesa atpro tlineabovethehigherstrikepriceanda atlosslinebelowthelowerstrikeprice Traderssetupbullishspreadswhentheyareoptimisticabouttheunderlyingstock Turnover This study source was downloaded by 100000813270448 from CourseHero com on 04 25 2022 17 47 29 GMT 05 00 https www coursehero com file 83382168 workshop 3 Solutionpdf 932N1FinancialDerivativesWorkshop 3 b Seediagram 3 JC15 14 Usethefollowingdataforoptionsexpiringonthesamedate Drawpro tdiagramandidentifythestockpricecorrespondingtozeropro tandthemaximumpro tandlossforalongbutter yspreadmadeupofputoptions Rememberthatalongbutter yspreadissomethingthatmakesasmallpro t ifthevolatilityislow StockStrikePriceCallPricePutPrice292551302335164 JC15 18 a Whatisacollarintheoptionsmarket b Howwouldyoucreateazero costcollar c Whymightacoppermanufacturer nditusefultoemploythisstrategy Page2of5 This study source was downloaded by 100000813270448 from CourseHero com on 04 25 2022 17 47 29 GMT 05 00 https www coursehero com file 83382168 workshop 3 Solutionpdf 932N1FinancialDerivativesWorkshop 3Solution a Acollaronalongstockpositioniscreatedbyaddingalongput sandshortcall s b Azerocostcollarisacollarwherethecostofpurchasingaput sispaidforbywritingcall ssothatnonetin oworout owofcashoccurs c Acoppermanufacturermayemployacollartohedgeoutputpricerisktoprotectagainstadeclineincopperpricesinthemarket Thecompanysurrenderssomeofthepotentialupsidegainsfromanincreaseincopperpricesduetothewrittencalls 5 JC16 1 UsethefollowingdataforEuropeanoptions Callprice 5 risk freecompoundedinterestrater 5 peryear stockpriceS 55 strikepriceK 55 timetomaturityT 1month IfthequotedputpriceispQ 9 showhowtocapturearbitragepro tsinthismarket Solution Thepriceofazero couponbondmaturinginonemonthise rT e 0 05 1 12 0 995842 ByResult16 1put callparity PCP forEuropeanoptions thearbitrage freeputpricepAF cQ BK S 5 0 9958 55 55 4 77 Thisissigni cantlylowerthanthequotedputpricepQ 9 suggestingthatthequotedputpriceisinconsistentwithPCPandhenceanarbitrageopportunity Arbitragepro tsaremadebysellingtherelativelyoverpricedmarket quotedput pQ andbybuyingtheunderpricedsyntheticput bybuyingquotedcall buyingzero couponbondsequaltopresentvalueofthestrike andshort sellingthestock ThisgivespQ pAF pQ cQ BK S 9 5 0 9958 55 55 4 23asimmediatearbitragepro ts And therearetwopossibilitiesontheexpirationdate IfthestockpriceatexpirationS T islessthanorequalto 55 thentheputisin the moneyandshortputhasapayo of 55 S T The 55availablefrommaturingzero couponbondsisusedtopayo the 55 andthestockavailablefromtheputoptionisusedtomeettheshortstockobligation Thisgivesazeronetpayo Page3of5 Turnover This study source was downloaded by 100000813270448 from CourseHero com on 04 25 2022 17 47 29 GMT 05 00 https www coursehero com file 83382168 workshop 3 Solutionpdf 932N1FinancialDerivativesWorkshop 3 IfS T isgreaterthan 55 thentheputexpiresworthless Howeverthelongcalltradehasapayo of S T 55 fromthis thestockisusedtomeettheshortstockobligation andthe 55liabilityismetwiththe 55availablefromthematuringzero couponbonds Thisalsogivesazeronetpayo Thus theportfoliowehavecreatedgivesanimmediatearbitragepro tof 4 23andhaszeropayo sonotherdatesunderallpossiblestockprices 6 JC16 6 Usingput callparity givenc 2 PV Div 1 p 1 S K 100 r 0 05peryearandT 0 25years canyoumakearbitragepro ts Explain Solution Thepriceofazero couponbondmaturingin0 25yearsise rT e 0 05 0 25 0 9876 Byput callparityforEuropeanoptions adjustedfordividends thearbitrage freeputpricepAF cQ BK S PV Div 2 0 9876 100 100 1 1 76 ThisishigherthanthequotedputpricepQ 1 suggestingthatthequotedputpriceisinconsistentwithPCPandhenceanarbitrageopportunity Wecansetupastrategybybuyingtherelativelyunderpricedmarket quotedputandsellingtheoverpricedsyntheticput bysellingquotedcall sellingzero couponbondsequaltopresentvalueofthestrike buyingthestock andsellingzero couponbondequaltopresentvalueofdividends Thisgives pQ pAF pQ cQ BK S PV Div 1 2 0 9876 100 100 1 0 76inimmediatearbitragepro t Anditcanbeshownthattheportfoliohaszeropayo atallfuturedates ontheex dividenddateandontheexpirationdate underallstockpricepossibilities 7 JC16 12 Itittruethatthelowertheexerciseprice themorevaluablethecall Explainyouranswer Page4of5 This study source was downloaded by 100000813270448 from CourseHero com on 04 25 2022 17 47 29 GMT 05 00 https www coursehero com file 83382168 workshop 3 Solutionpdf Powered by TCPDF www tcpdf org 932N1FinancialDerivativesWorkshop 3Solution Thisistrue Thelowerthestrikeprice themorechancethattheoptionwillbein the moneysincethestockpricehasalowerboundtosurpass Thelowerthestrikeprice themorevaluabletheEuropeancall ThisresultholdsforAmericanoptionsaswell Page5of5