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. 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 long position in a forward with a contract price of $50 (2) A long position in a call option with an exercise price of $50 and a front-end pre- mium expense of $5.20 Expiration Date Expiration Date Sophia Stock Price Derivative Payoff Derivative Premium Net Profit 25 30 35 40 45 50 55 60 65 70 75 Initial (3) A short position in a call option with an exercise price of $50 and a front-end premium receipt of $5.20 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.
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. 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 long position in a forward with a contract price of $50 (2) A long position in a call option with an exercise price of $50 and a front-end pre- mium expense of $5.20 Expiration Date Expiration Date Sophia Stock Price Derivative Payoff Derivative Premium Net Profit 25 30 35 40 45 50 55 60 65 70 75 Initial (3) A short position in a call option with an exercise price of $50 and a front-end premium receipt of $5.20 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.
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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Transcribed Image Text:PROBLEMS
1. 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.
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 long position in a forward with a contract price of $50
(2) A long position in a call option with an exercise price of $50 and a front-end pre-
mium expense of $5.20
Expiration Date
Expiration Date
Sophia Stock Price Derivative Payoff Derivative Premium Net Profit
25
30
35
40
45
50
55
60
65
Initial
70
75
(3) A short position in a call option with an exercise price of $50 and a front-end
premium receipt of $5.20
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.
Expert Solution
Given,
Exercise Price = $50
Long Call Premium = $5.20
Short Call Premium = $5.20
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