A. Determine; I. If you would exercise the call option or not? [Show all workings] II. Profit generated from executing the call option right? B. Determine the value of a 8-months call option, with an exercise price of K500 using Black –Scholes formula C. At the time of purchasing the call option, the option selling price was K350 and the underlying share market price was K4 per unit share. Three years later, the option selling price is K500 and the underlying market price is K264 per unit share. Determine the quantity to buy or sell to have a neutral position and avoid risk if Zambeef purchased 10,000 units call option contracts with a multiplier (Value) of K300.
The Financial Markets proficiency has been more inclined to interest rates products
such as loans and term deposits in Zambia than structured products. With the adverse
economic repercussions that countries, including Zambia experienced during the
outbreak of COVID-19, the market has moved to structured products provision such as
options, forwards, to mention but a few. The implementation of risk mitigation strategic
by most companies made the financial market to enhance structured products that are
suitable to hedge all risks arising from investments and business operations.
Assuming Zambeef employees you as the Investment Hedging Director to manage the
investment in Zambia, you approach your bank, Standard Chartered Bank to structure
an option to help hedge Zambeef future shares transactions. You enter into a 5 years
call option contract at an exercise price of K350 and paid option premium amounting to
K50. Three years later, the company has an increase in operational needs and decides
to assess the market on the selling prices and conditions and establishes that;
Selling price; K500
Annualized riskless rate; 22%
Standard deviation in stock prices (based upon historical data); 40%.
The mean in stock prices (based upon historical data); 30%
Required:
A. Determine;
I. If you would exercise the call option or not? [Show all workings]
II. Profit generated from executing the call option right?
B. Determine the value of a 8-months call option, with an exercise price of K500 using
Black –Scholes formula
C. At the time of purchasing the call option, the option selling price was K350 and the
underlying share market price was K4 per unit share. Three years later, the option
selling price is K500 and the underlying market price is K264 per unit share.
Determine the quantity to buy or sell to have a neutral position and avoid risk if
Zambeef purchased 10,000 units call option contracts with a multiplier (Value) of
K300.
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