Expert answer:Finance Strategies

Expert answer:See the attached document for the problems.See the attached document for the problems.See the attached document for the problems.
fin_310___homework_3___2017__1_.docx

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Homework #3
Complete all four questions below. The homework will be graded mostly based on completeness
(refer to the syllabus for details). Show your work. You may work with other students, but you
must submit your own work. Please do not copy somebody’s homework as we will be checking
for that. Remember to include both your name and section time (1 pm or 2 pm).
Question 1 (Final 2010: 10 points; this is the points for that final not for this homework)
Consider the following investment strategy using European options on Ford that expire in July.
Write one call option with an exercise price of $170, and write another call option with an
exercise price of $195. The first call (X=$170) is currently priced at $10 and the second call
(X=$195) is priced at $5.
(a) (4 points) Plot the profit of this strategy
(b) (3 points) Why would you follow this strategy
(c) (3 points) What are the stock prices at which this strategy would break even?
Question 2 (Final 2010: 10 points)
Consider a European put option with an exercise price of $70 on a stock which is selling for $55
today. Assume that there is one period until maturity of the option. Let R=1.05 per period and
u=1.3 and d=0.5. The stock does not pay out any dividends during the life of the option.
(a) (7 points) What is the price today of this put option?
(b) (3 points) If the strike price was $60 would the put be priced higher or lower? Why? You
do not have to calculate the new price to get full credit.
Question 3 (Final 2011: 10 points)
(a)
(3 points) The spot price for gold is $650. The risk-free interest rate is 5%. What
is the futures price for gold for a six-month contract?
(b)
(5 points) The six-month futures price in the market is $682.50. Is there an
arbitrage opportunity here? Why? If so how would you exploit it? Explain.
(c)
(2 points) Consider the formula on the formula sheet:
F0  P0 1  r f  c 
What does ‘c’ represent? What is ‘c’ likely to be for gold? What about for oil?
Why? Hint: I am not looking for a numerical answer here.
Question 4
Consider following strategy: Write both a put and a call on Tesla stock with strike prices of $35.
The price of the call and put are $3 and $5 respectively.
(a)
(b)
(c)
(d)
(e)
Draw the payoff diagram for this strategy.
Draw the profit diagram for this strategy.
For what range of prices does this strategy make a profit.
What is the maximum loss to this strategy?
“You employ this strategy if you think volatility will be high.” True or False.
Why?
…
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