Question

Solve part (c) and (d) of this problem below: XYZ plc has been offered the following quotes for options on the dollar given a current market price of 60 pence:

Strike price of dollar in pence Call premium Put premium

                                           1 year           1 year

62                                        6.9               3.0

64                                        5.9               3.8

66                                        4.8               4.5

67                                        4.5               5.1
a. Calculate the net payout from a purchased call option at a strike price of 67 pence for the following possible maturity prices 55p, 60p,65p,70p,75p.
b. Calculate the net payout for a written put option at 66p for the following possible maturity prices: 55p, 60p, 65p, 70p, 75p.
c. Calculate the total cost of the dollar if the MNC were to implement part a and part b of this question for the following maturity prices: 55p, 60p, 65p, 70p, 75p.
d. Outline the advantages and disadvantages of purchasing a call at 67p and writing a put at 66p for a MNC importing from the US.

Answer 1

Answer c) The pay off from long call = Max( S-K-P ,-P)

The pay off from writing Put = Max( S-K+P ,P)

Spot Price	Strike	Call premium	Pur premium		Long Call payoff ( C )	Writing Put payoff(L)		Net Pay off (l+C)
55	62	6.9	3	MAX((A2-B2-C2),-C2)	-6.9	6.9	MAX((A2-B2+C2),C2)	0
55	64	5.9	3.8		-5.9	5.9		0
55	66	4.8	4.5		-4.8	4.8		0
55	67	4.5	5.1		-4.5	4.5		0
60	62	6.9	3		-6.9	6.9		0
60	64	5.9	3.8		-5.9	5.9		0
60	66	4.8	4.5		-4.8	4.8		0
60	67	4.5	5.1		-4.5	4.5		0
65	62	6.9	3		-3.9	9.9		6
65	64	5.9	3.8		-4.9	6.9		2
65	66	4.8	4.5		-4.8	4.8		0
65	67	4.5	5.1		-4.5	4.5		0
70	62	6.9	3		1.1	14.9		16
70	64	5.9	3.8		0.1	11.9		12
70	66	4.8	4.5		-0.8	8.8		8
70	67	4.5	5.1		-1.5	7.5		6
75	62	6.9	3		6.1	19.9		26
75	64	5.9	3.8		5.1	16.9		22
75	66	4.8	4.5		4.2	13.8		18
75	67	4.5	5.1		3.5	12.5		16

Answer d) Purchasing a call at 66P and writing a Put on 67 will have pay off as below,

Spot Price	Strike	Call premium	Pur premium	Long Call payoff ( C )	Writing Put payoff(L)	Net Pay off (l+C)
55	66	4.8	4.5	-4.8	4.8	0
55	67	4.5	5.1	-4.5	4.5	0
60	66	4.8	4.5	-4.8	4.8	0
60	67	4.5	5.1	-4.5	4.5	0
65	66	4.8	4.5	-4.8	4.8	0
65	67	4.5	5.1	-4.5	4.5	0
70	66	4.8	4.5	-0.8	8.8	8
70	67	4.5	5.1	-1.5	7.5	6
75	66	4.8	4.5	4.2	13.8	18
75	67	4.5	5.1	3.5	12.5	16

Advantage : never in loss , no negative payoff from strategy

Disadvantage : Upside is also limited due to short difference in strike prices of two options

and