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(2) A long position in a put option with an exercise price of $50 and a front-end pre- mium expense of $3.23 (3) A short position in a put option with an exercise price of $50 and a front-end pre- mium receipt of $3.23 Expiration Date Sophia Stock Price 25 30 35 40 45 50 55 60 65 70 75 Expiration Date Derivative Payoff Derivative Premium Initial Net Profit

(2) A long position in a put option with an exercise price of $50 and a front-end pre- mium expense of $3.23 (3) A short position in a put option with an exercise price of $50 and a front-end pre- mium receipt of $3.23 Expiration Date Sophia Stock Price 25 30 35 40 45 50 55 60 65 70 75 Expiration Date Derivative Payoff Derivative Premium Initial Net Profit

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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I need the solution of A.2 only

2. Refer once again to the derivative securities using Sophia common stock as an underlying asset discussed in Problem 1. a. Assuming that all Sophia derivatives expire at the same date in the future, complete a table similar to the following for each of the following contract positions: (1) A short position in a forward with a contract price of $50 (2) A long position in a put option with an exercise price of $50 and a front-end pre- mium expense of $3.23 (3) A short position in a put option with an exercise price of $50 and a front-end pre- mium receipt of $3.23 Expiration Date Sophia Stock Price 25 30 35 40 45 50 55 60 65 70 75 Expiration Date Derivative Payoff Derivative Premium Net Profit Initial In calculating net profit, ignore the time differential between the initial derivative ex- pense or receipt and the terminal payoff. b. Graph the net profit for each of the three derivative positions, using net profit on the vertical axis and Sophia's expiration date stock price on the horizontal axis. Label the breakeven (i.e., zero profit) point(s) on each graph. c. Briefly describe the belief about the expiration date price of Sophia stock that an in- vestor using each of these three positions implicitly holds.
Transcribed Image Text:2. Refer once again to the derivative securities using Sophia common stock as an underlying asset discussed in Problem 1. a. Assuming that all Sophia derivatives expire at the same date in the future, complete a table similar to the following for each of the following contract positions: (1) A short position in a forward with a contract price of $50 (2) A long position in a put option with an exercise price of $50 and a front-end pre- mium expense of $3.23 (3) A short position in a put option with an exercise price of $50 and a front-end pre- mium receipt of $3.23 Expiration Date Sophia Stock Price 25 30 35 40 45 50 55 60 65 70 75 Expiration Date Derivative Payoff Derivative Premium Net Profit Initial In calculating net profit, ignore the time differential between the initial derivative ex- pense or receipt and the terminal payoff. b. Graph the net profit for each of the three derivative positions, using net profit on the vertical axis and Sophia's expiration date stock price on the horizontal axis. Label the breakeven (i.e., zero profit) point(s) on each graph. c. Briefly describe the belief about the expiration date price of Sophia stock that an in- vestor using each of these three positions implicitly holds.
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