Suppose you purchased 4,700 shares at the beginning of January (the beginning of Quarter 1) at the market price. If you decide that you made a mistake purchasing the stock and sell all of your shares once the price drops to $30, your profit will be S Suppose you purchased American-style call options for $3 per share with an exercise price of $50 that expires at the end of March. Given the stock price, you exercise the call option because it is As a result, your profit will be S (Hint: If you exercise the call option, assume you immediately resell the shares at the highest price in Quarter 1.) Given each of your answers in this problem, and that investors are perfect call makers, what conclusion can be made? Check all that apply. When an investor thinks the price of a stock will decrease, purchasing call options will result in a higher profit (or lower loss) than purchasing the stock. When an investor thinks the price of a stock will increase, purchasing call options will result in a lower profit (or greater loss) than purchasing the stock. When an investor thinks the price of a stock will decrease, purchasing call options will result in a lower profit (or greater loss) than. purchasing the stock.

Suppose you purchased 4,700 shares at the beginning of January (the beginning of Quarter 1) at the market price. If you decide that you made a mistake purchasing the stock and sell all of your shares once the price drops to $30, your profit will be S Suppose you purchased American-style call options for $3 per share with an exercise price of $50 that expires at the end of March. Given the stock price, you exercise the call option because it is As a result, your profit will be S (Hint: If you exercise the call option, assume you immediately resell the shares at the highest price in Quarter 1.) Given each of your answers in this problem, and that investors are perfect call makers, what conclusion can be made? Check all that apply. When an investor thinks the price of a stock will decrease, purchasing call options will result in a higher profit (or lower loss) than purchasing the stock. When an investor thinks the price of a stock will increase, purchasing call options will result in a lower profit (or greater loss) than purchasing the stock. When an investor thinks the price of a stock will decrease, purchasing call options will result in a lower profit (or greater loss) than. purchasing the stock.

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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You buy a share of Stock A (today) at a price of $50 a share. You intend to hold it for four months. Having bought the share, you would like to protect your downside while participating completely on the upside. Specifically, you would like to ensure that your investment does not fall below $50. Both a call and a put are available (on Stock A) with an exercise price of $50. The options are European and expire in four months. a) What strategy would you employ to meet your objectives? b) Use a table to show the total payoff on your overall strategy (or portfolio) at the end of your investment horizon (in four months). c) Draw the total payoff diagram for your overall strategy (or portfolio) at the end of your investment horizon (in four months). Label your axes and mark them with appropriate values where necessary.
A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a particular point in time after the purchase of the option. For example, suppose you purchase a six-month European put option for a share of stock with an exercise price of $26. If six months later, the stock price per share is $26 or more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $26 - $22.50 = $3.50 per share, less the cost of the option. If you paid $1.00 per put option, then your profit would be $3.50 - $1.00 =…
You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $240 at year-end. XYZ currently sells for $240. Over the next year, the stock price will either increase by 7% or decrease by 7%. The T-bill rate is 3%. Unfortunately, no put options are traded on XYZ Company. Required: a. How much would it cost to purchase if the desired put option were traded? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What would be the cost of the protective put portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a particular point in time after the purchase of the option. For example, suppose you purchase a six-month European put option for a share of stock with an exercise price of $26. If six months later, the stock price per share is $26 or more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $26 − $22.50 = $3.50 per share, less the cost of the option. If you paid $1.00 per put option, then your profit would be $3.50 − $1.00 =…
Consider a stock priced at $33 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 35 and a time to expiration of six months. The calls are priced at $2.39 and the puts cost $2.05. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Suppose the investor constructed a covered call. If the transaction is closed out when the option has three months to go and the stock price is at $39, what is the investor's profit?
You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $109 at year- end. XYZ currently sells for $109. Over the next year the stock price will increase by 12% or decrease by 12%. The T-bill rate is 6%. Unfortunately, no put options are traded on XYZ Co. a. Suppose the desired put option were traded. How much would it cost to purchase? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost to purchase b. What would have been the cost of the protective put portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost of the protective put portfolio c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = 109? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put. (Do not round…
A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a particular point in time after the purchase of the option. For example, suppose you purchase a six-month European put option for a share of stock with an exercise price of $26. If six months later, the stock price per share is $26 or more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $26 − $22.50 = $3.50 per share, less the cost of the option. If you paid $1.00 per put option, then your profit would be $3.50 − $1.00…
You own a call option on Intuit stock with a strike price of $34. When you purchased the option, it cost $6. The option will expire in exactly three months' time. a. If the shares are trading at $43 in three months, what will be the payoff of the call? What will be the profit of the call? b. If the shares are trading at $31 in three months, what will be the payoff of the call? What will be the profit of the call? c. Draw a payoff diagram showing the value of the call at expiration as a function of the share price at expiration. d. Redo (c), but instead of showing payoffs, show profits. a. The payoff of the call is $ (Round to the nearest dollar.) and the profit of the call is $
A stock's current price is $20 and a 3-month call with a strike price of $22 sells for $2. You have $4,000 to invest and are comparing two alternate strategies: 1) Buy 200 shares of the stock; 2) Buy 2,000 call options on the stock. Which of the following is correct? The two strategies are equally profitable when the stock price is $26.00 O b. The two strategies are equally profitable when the stock price is $22.00 О с. The option strategy is more profitable when the stock price is $26.00 LO
You bought a $50 strike call option on a stock XYZ for $8.20 and then sold/wrote a $65 call option for $4.35. What price would the stock have to be at expiration for you to start losing profit?
Suppose that on 27 October 2022, Wall Street Journal in New York presents the following price for 27 March 2023 call options on Microsoft stock (in $ USA) strike 75 80 85 price 11 7.96 5.5 while the annual interest rate is 4% per year. On this date (27 October 2022) the Microsoft stock was trading at $81.625. Suppose we decide that the volatility of the market is 30%. Should you buy the call option as the European one with strike price $80? Justify your answer.
Suppose you have $28,000 to invest. You're considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You notice that a put option with a $40 strike is available with a premium of $2.80. Calculate your percentage return on the put option for the six-month holding period if the stock price declines to $36 per share. (Do not round intermediate calculations. Enter your 6-month return as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) Percentage return %

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