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
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
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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The common stock of Sophia Enterprises serves as the underlying asset for the following derivative securities: (1) forward contracts, (2) European-style call options, and (3) European- style put options.
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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