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Class Practice 6

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6 views

Class Practice 6

Uploaded by

ke ke
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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UGEB 2491 – Class Practice 6

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.

2. Suppose that a European put option to sell a share for $60 costs $8 and is held until maturity.
Under what circumstances will the seller of the option (the party with the short position) make
a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating
how the profit from a short position in the option depends on the stock price at maturity of the
option.

3. What is a lower bound for the price of a four-month call option on a non-dividend-paying
stock when the stock price is $28, the strike price is $25, and the risk-free interest rate is 8%
per annum?

4. What is a lower bound for the price of a six-month call option on a non-dividend-paying stock
when the stock price is $80, the strike price is $75, and the risk-free interest rate is 10% per
annum?

5. Consider a position consisting of a $100,000 investment in asset A and a $100,000 investment


in asset B. Assume that the daily volatilities of both assets are 1% and that the coefficient of
correlation between their returns is 0.3. What is the 5-day 99% VaR for the portfolio?

• Given that a standard result in statistics states that

σ X +Y = σ X2 + σ Y2 + 2 ρσ X σ Y

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