HW 3.2

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STAT 473 Spring 2024 Chapter 3.2 Homework February 1, 2024 Dan Rubin Use the following information for questions 1-3. You are given a table of 6-month call option prices for ZOO Animals Ltd. (ZOO). ZOO is currently trading at $80. The 6-month risk-free rate is 5.00%. Strike Price Call Premium 80 8.78 84 6.85 88 5.26 1. a. (3 points) Create a payoff-profit table for a 6-month Bull Call Spread on ZOO stock of width 4 where the lower strike call option is “at the money”. For the table, assume spot prices from 76 to 90 in increments of 2. Spot at Long Short Total Cost + Expiration Call Call Payoff Interest Profit b. (1 point) What is the maximum risk for this position? c. (1 point) What is the breakeven spot price in 6 months? d. (1 point) What is the maximum profit for this position?

STAT 473 Spring 2024 Chapter 3.2 Homework February 1, 2024 Dan Rubin 2. a. (3 points) Create a payoff-profit table for a 6-month Bull Call Spread on ZOO stock of width 4 where the lower strike call option is “out of the money”. For the table, assume spot prices from 80 to 94 in increments of 2. b. (1 point) What is the maximum risk for this position? Show Work. Ans = 1.67 c. (1 point) What is the breakeven spot price in 6 months? d. (1 point) What is the maximum profit for this position? 3. a. (5 points) Create a payoff-profit table for a 6-month Bear Put Spread on ZOO stock of width 4 where the lower strike put option is “at the money”. Recall that any needed option prices can be derived from the Put-Call Parity formula. For the table, show the payoff of each option used and assume spot prices from 77 to 87 in increments of 1 . HINT: The premium for a Put with a Strike of 88 is $9.07. b. (1 point) What is the maximum risk for this position? c. (1 point) What is the breakeven spot price in 6 months? d. (1 point) What is the maximum profit for this position?

STAT 473 Spring 2024 Chapter 3.2 Homework February 1, 2024 Dan Rubin Use the following information to complete questions 4-8. The annual risk-free interest rate is 7.1225%. All stocks mentioned do not pay a dividend. All options mentioned are European style. The current spot price of Southwest Airlines (LUV) is 40.00. The forward price for a 6-month forward contract on Southwest Airlines is 41.40. You have the following premiums for European style calls on Southwest Airlines (LUV) which expire in 6 months: 4. a. (3 points) Create a payoff-profit table for an at the money Long Straddle on LUV stock. For the table, use spot prices in 6-months from 30 to 50 in increments of 2. b. (1 point) What is the maximum risk of this position? c. (1 point) What is the maximum reward of this position? d. (1 point) What is the upside break even spot price? e. (1 point) What is the downside break even spot price?

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STAT 473 Spring 2024 Chapter 3.2 Homework February 1, 2024 Dan Rubin 5. a. (3 points) Create a payoff-profit table for a Long Strangle of width 8 on LUV stock. For the table, use spot prices in 6-months from 30 to 50 in increments of 2. b. (1 point) What is the maximum risk of this position? c. (1 point) What is the maximum reward of this position? d. (1point) What is the upside break even spot price? e. (1 point) What is the downside break even spot price? 6. a. (3 points) Create a payoff-profit table for a Written Strangle of width 8 on LUV stock. For the table, use spot prices in 6 months from 30 to 50 in increments of 2. b. (1 point) What is the maximum risk of this position? c. (1 point) What is the maximum reward for this position?

STAT 473 Spring 2024 Chapter 3.2 Homework February 1, 2024 Dan Rubin 7. a. (5 points) Create a payoff-profit table for Long Butterfly on LUV stock using call options. For the table, use spot prices in 6 months from 34 to 46 in increments of 1. (1 point each) b. What is the maximum risk of this position? c. What is the maximum reward for this position? d. What is the upside breakeven spot price? e. What is the downside breakeven spot price? f. What would the cost (+interest) of a Short Butterfly on LUV stock using call options be? g. What would the cost (+interest) of a Long Butterfly on LUV stock using put options be? h. Does your answer to g. meet / not meet your expectations about Butterfly’s using Calls and Puts? Why? 8. a. (3 points) Specifically state what options would you buy and/or sell to construct a Box Spread with a payout of $8.00. b. (4 points) State explicitly what steps you would take to arbitrage these options, if such an opportunity exists. If not, state why not.

STAT 473 Spring 2024 Chapter 3.2 Homework February 1, 2024 Dan Rubin 9. You are Long a LUV Jul 19, 2024 $30 Call option. Fill in the blank with the option “Strategy” name for when you COMBINE this position with each of the following: (1.5 points each) a. Short LUV Jul 19, 2024 $35 Call __________________________ b. Long LUV Jul 19, 2024 $30 Put __________________________ c. Short LUV Apr 17, 2024 $30 Call __________________________ d. Short LUV Jul 19, 2024 $25 Call __________________________ e. Long LUV Jul 19, 2024 $25 Put __________________________ f. Short LUV Jul 19, 2024 $30 Put __________________________

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