HW 2

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Apr 3, 2024

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STAT 473 Spring 2024 Chapter 2 Homework Use the following information to complete problems 1-15 (3 points each) The current spot price of the stock of Southwest Airlines (LUV) is 30.00 The current annual effective risk free interest rate is 6.09%. The forward price for a 6 month forward contract on LUV stock is 30.9 A 6 month European style call option on LUV stock with a strike price of 30 has a premium of 1.50 A 6 month European style put option on LUV stock with a strike price of 30 has a premium of 2.00 1. Creat a payoff-profit table for a long forward contract. (Use spot prices at expiration of 28 - 34 in increments of 1) Spot 6 months Payoff / Profit 28.00 -2.90 2. Creat a payoff-profit table for a short forward contract. (Use spot prices at expiration of 28 - 34 in increments of 1) 3. Creat a payoff-profit table for LUV stock. Assume you buy the stock now. Then you sell your stock in 6 months. (Use spot prices in 6 months of 28 - 34 in increments of 1) Spot 6 months Receive Pay + Int Profit 28.00 28.00 -30.90 -2.90 4. Creat a payoff-profit table for the situation where you short LUV stock. (Use spot prices in 6 months of 28 - 34 in increments of 1) Assume you sell the stock now. Then you cover your position in the stock in 6 months. 5. Creat a payoff-profit table for a long call option. Use spot prices at expiration of 28 - 35 in increments of 1. Spot 6 months Payoff Cost + Int Profit 28.00 0.00 -1.55 -1.55 6. Creat a payoff-profit table for a short call option. Use spot prices at expiration of 28 - 35 in increments of 1. 7. Creat a payoff-profit table for a long put option. Use spot prices at expiration of 25 - 32 in increments of 1. 8. Creat a payoff-profit table for a short put option. Use spot prices at expiration of 25 - 32 in increments of 1. January 18, 2024 Dan Rubin

STAT 473 Spring 2024 Chapter 2 Homework 9. Calculate the maximum profit that you could have on a short forward: 10. Calculate the minimum profit (maximum loss) that you could have on a long call: 11. Determine the spot price of LUV stock in 6 months such that the profit will be zero on a put option: 12. Calculate the minimum profit (maximum loss) on a long put contract: 13. Calculate the maximum profit on a short put contract: 14. Determine the spot price of LUV stock in 6 months such that the profit will be zero on a call option: 15. Define the three STYLES of options. 16-20: True/False - 1 point each 16. If you are short a put option that is exercised, and you are assigned, then you are required to buy the stock at the strike price. 17. An American option can be exercised only at the expiration date. 18. A call option gives the owner the right to purchase a fixed number of shares at a specified price, but no right to receive dividends paid during the life of the option. 19. A call option with strike price of 40 is out of the money if the spot price of the underlying asset is 45. 20. Requiring a letter of credit or collateral is a way to protect oneself from counterparty credit risk. January 18, 2024 Dan Rubin

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