Carefully draw the payoff diagram of a portfolio consisting of one call option with exercise priceK%, short two call options with delivery price 2K% and long three call options with delivery price3K. All options have the same maturity date and the same underlying stock. What reasons could a speculatorhave for holding such a portfolio?[9 Marks]

Payoff Diagram of the PortfolioUnderlying Stock Price (X-axis):This axis represents the possible…

Answered: Carefully draw the payoff diagram of a…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13QTD

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Carefully draw the payoff diagram of a portfolio consisting of a long position in two call options with exercise price ?, a short position in five call options with exercise price 2? and a long position in four call options with exercise price 3?. All options have the same maturity date and the same underlying stock. What reasons could a speculator have for holding such a portfolio (explain in detail)?
b) Carefully draw the payoff diagram of a portfolio consisting of a long position in two call options with exercise price K a short position in five call options with exercise price 2K and a long position in four call options with exercise price 3K?. All options have the same maturity date and the same underlying stock. What reasons could a speculator have for holding such a portfolio (explain in detail)?
Draw the profit diagram (profit not payoff) of a portfolio consisting of a long position in two call options with exercise price ?, a short position in five call options with exercise price 2? and a long position in four call options with exercise price 3?. All options have the same maturity date and the same underlying stock. Clearly state any assumptions made. Is the cost of the portfolio positive?
a) Carefully draw the payoff diagram of a portfolio consisting of a long position in two call options with exercise price K, a short position in five call options with exercise price 2K and a long position in four call options with exercise price 3K. All options have the same maturity date and the same underlying stock. What reasons could a speculator have for holding such a portfolio (explain in detail)? b) Draw the profit diagram of the portfolio above (and clearly state any assumptions you make). Recall that the profit is equal to the difference between the payoff of the portfolio at expiry (maturity) date and the cost of the portfolio. Is the cost of the portfolio positive?
a) Carefully draw the payoff diagram of a portfolio consisting of a long position in two call options with exercise price ?, a short position in five call options with exercise price 2? and a long position in four call options with exercise price 3?. All options have the same maturity date and the same underlying stock. What reasons could a speculator have for holding such a portfolio (explain in detail)? b) Draw the profit diagram of the portfolio above (and clearly state any assumptions you make). Recall that the profit is equal to the difference between the payoff of the portfolio at expiry (maturity) date and the cost of the portfolio. Is the cost of the portfolio positive?
Consider the following portfolio: Long 0 calls with strike price 77.0 Short 1 calls with strike price 77.0 Long 1 calls with strike price 102.0 Short 0 calls with strike price 102.0 Complete the following payoff table. What choice corresponds to the last row of the table? Position ST ≤ 77.0 77.0 < ST ≤ 102.0 ST > 102.0 portfolio
b) Carefully draw the payoff diagram of a portfolio consisting of a long position in two call options with exercise price K, a short position in five call options with exercise price 2K and a long position in four call options with exercise price 3K. All options have the same maturity date and the same underlying stock. What reasons could a speculator have for holding such a portfolio (explain in detail)? c) Draw the profit diagram of the portfolio above (and clearly state any assumptions you make). Recall that the profit is equal to the difference between the payoff of the portfolio at expiry (maturity) date and the cost of the portfolio. Is the cost of the portfolio positive?
Consider the following portfolio: Long 0 puts with strike price 98.0 Short 1 puts with strike price 98.0 Long 0 calls with strike price 100.5 Short 1 calls with strike price 100.5 Complete the following payoff table. What choice corresponds to the last row of the table? Position ST ≤ 98.0 98.0 < ST ≤ 100.5 ST > 100.5 portfolio
Consider two portfolios A and B. At the expiration date, t, both portfolios have identical payoffs. Portfolio A consists of a put option and one share of stock. Portfolio B has a call option (with the same strike price and expiration date as the put option) and cash in the amount equal to the present value (PV) of the strike price discounted at the continuously compounded risk-free rate, which is Xe−rRFtXe−rRFt. At expiration, the stock price is Ptt, and the value of this cash will equal the strike price, X. As defined in the Black–Scholes model, let N(didi) stand for probability that a deviation less than didi will occur in a standard normal distribution and N(d₁) and N(d₂) represent areas under a standard normal distribution function. Complete the equation for the value of a put option.
Find the weights of the two pure factor portfolios constructed from the following three securities: r1 = .06 + 2F¡ + 2F, r2 = .05 + 3F, + IF, r3 = .04 + 3F, + OF, Then write out the factor equations for the two pure factor portfolios, and determine their risk premiums. Assume a risk-free rate that is implied by the factor equations and no arbitrage.
Show how you would make a portfolio delta-neutral and also self-financing by including bonds and call options to a stock that is currently traded at sh. 100, given that the delta for the call = 0.2499 and the call price = sh5.55.
Consider two portfolios A and B. At the expiration date, t, both portfolios have identical payoffs. Portfolio A consists of a put option and one share of stock. Portfolio B has a call option (with the same strike price and expiration date as the put option) and cash in the amount equal to the present value (PV) of the strike price discounted at the continuously compounded risk-free rate, which is Xe−rRFtXe−rRFt. At expiration, the stock price is Ptt, and the value of this cash will equal the strike price, X. As defined in the Black–Scholes model, let N(didi) stand for probability that a deviation less than didi will occur in a standard normal distribution and N(d₁) and N(d₂) represent areas under a standard normal distribution function. Complete the equation for the value of a put option. Put Option = – Now consider the stock of Grotesque Enterprises (GE) traded at the price P = $35 per share. A put option written on GE’s stock has an exercise price…

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