Professional Documents
Culture Documents
a)
Scenario Price at Expiry < Strike Price Strike Price < Price at Expiry
Value of Stock Price at Expiry + Dividend Price at Expiry + Dividend
Value of Put Strike Price - Price at Expiry 0
Total value Strike Price + Dividend Price at Expiry + Dividend
b)
Scenario Price at Expiry < Strike Price Strike Price < Price at Expiry
Value of Zero Coupon Bond Strike Price (X) + Dividend (D) Strike Price (X) + Dividend (D)
Value of Call 0 Price at Expiry - Strike Price
Total value Strike Price (X) + Dividend (D) Price at Expiry + Dividend
We can see that the value of the Zero coupon bond + the call option = value of stock + put option
c)
S0 + P = C + PV (X + D)
P = C – So + PV(X) + PV(D)
2) Chapter 20 Question 13
a)
Position St < X1<X2<X3 X1 < St < X2<X3 X1< X2 < St < X3 X1< X2 < X3 < St
12.5 < 15 < 20 < 15 < 17.5 < 20 < 15 < 20 < 22.5< 15 < 20 < 25 <
Example 25 25 25 27.5
Long call (X1) 0 St-X1 St-X1 St-X1
Short 2 calls
(X2) 0 0 -2 (St-X2) -2 (St-X2)
Long call (X3) 0 0 0 St-X3
Total 0 St-X1 2X2 - X1 - St X2-X1 + X2-X3 = 0
X1 X2 X3 St ->
b)
X1 X2 St->
3) Chapter 20 Question 14
X1 X2 St->
4) Chapter 20 CFA Question 1
Strangle strategies are used when investors expect a big price movement, but is unsure of
the direction of the movement.
Long Strangle = Long Call (at higher strike price) and Long Put (at lower strike price)
Short Strangle = Short Call (at higher strike price) and Short Put (at lower strike price)
a) Donna could recommend the long strangle strategy. An investor who goes long a
strangle expects that the price of the underlying asset (TRT materials) will either move
substantially below the exercise price on the put or above the exercise price on the call.
b)
i. The maximum possible loss per share is $9.00, which is the total cost of the two
options (5+4)
ii. The maximum possible gain is theoretically unlimited if the stockprice moves outside
the breakeven range of prices. This specially holds true if the stock price rises. If the
stock price falls, the gain is limited to the value of the put when the stock value is zero
iii. Breakeven on upside = 60+9 = $69. Breakeven on downside = 55-9 = $46
b) Commodity linked bear bond: The commodity linked bear bond allows an investor to
participate in a decline in a commodity’s price. In exchange for a lower than market
coupon, investors receive a redemption value that exceeds the purchase price if the
commodity price has declined by the maturity date.
Short call option leg - Strike Price = $40, Premium received = $3.5
Maximum amount received = premium = $3.50
9) Chapter 22 Question 12
According to the parity relation, the proper price for December futures is:
FDec = FJun (1+rf)^6/12 = 846.30*1.05^0.5 = $867.20
The actual December price is lower than the calculated one. One can go long in the
December contract and short the June contract
An arbitrage opportunity does exist. Joan can make use of a ‘reverse cash and
carry’. Joan can sell the asset short, use the proceeds to lend at the prevailing
interest rate, and then buy the asset for future delivery. At the future date, she
can collect the proceeds of the loan with interest, accept delivery of the asset
and cover the short position in the commodity.
b)
In futures and forwards, the dollar cost of financing is locked in regardless of the future
movements of the franc. The firm may face an issue with regard to mark to market in
the case of futures. It may face demands of large margin requirements if the currency
movements are large.
b) The call option may seem simple and more rewarding (ability to profit from a declining
franc), but there is a cost associated with it (the premium). This may be recommended
for firms with adequate financial expertise in currency speculation.
For firms without specialised knowledge, forwards or futures contracts may be
preferred, where the future costs of repaying the debt can be locked in.