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L1 Chapter 10 Problems

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28 views

L1 Chapter 10 Problems

Uploaded by

winston
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 10 Problems

Problem 10.1.
An investor buys a European put on a share for $3. The stock price is $42 and the strike price is
$40. Under what circumstances does the investor make a profit? Under what circumstances will
the option be exercised? Draw a diagram showing the variation of the investor’s profit with the
stock price at the maturity of the option.

Problem 10.2.
An investor sells a European call on a share for $4. The stock price is $47 and the strike price is
$50. Under what circumstances does the investor make a profit? Under what circumstances will
the option be exercised? Draw a diagram showing the variation of the investor’s profit with the
stock price at the maturity of the option.

Problem 10.12.
A trader buys a call option with a strike price of $45 and a put option with a strike price of $40.
Both options have the same maturity. The call costs $3 and the put costs $4. Draw a diagram
showing the variation of the trader’s profit with the asset price.

Problem 10.25.
A trader writes five naked put option contracts, with each contract being on 100 shares.
The option price is $10, the time to maturity is six months, and the strike price is $64.
(a) What is the margin requirement if the stock price is $58?
(b) How would the answer to (a) change if the rules for index options applied?
(c) How would the answer to (a) change if the stock price were $70?
(d) How would the answer to (a) change if the trader is buying instead of selling the
options?

Problem 10.26.
The price of a stock is $40. The price of a one-year European put option on the stock with a
strike price of $30 is quoted as $7 and the price of a one-year European call option on the stock
with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100
call options, and buys 100 put options. Draw a diagram illustrating how the investor’s profit or
loss varies with the stock price over the next year. How does your answer change if the investor
buys 100 shares, shorts 200 call options, and buys 200 put options?

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