Question

In: Finance

Consider: (a) Stock trades for $100; (b) Calls with exercise prices of $90, $100, and $110...

Consider:

(a) Stock trades for $100;

(b) Calls with exercise prices of $90, $100, and $110 trade at prices of $17.03, $10.38, and $6.50 respectively.

If a person buys a $90 call, writes two $100 calls, and buys a $110 call, what is the magnitude of her maximum loss? The answer is 2.77, how do you solve?

Type or paste question here

Solutions

Expert Solution

Solution:

This is the butterfly strategy where we buy two call option at different strike price and then sell 2 option between these two strike price.

Buy: Payoff of 90 call option = Max ( Share price - 90 , 0 ) - Premium paid

Buy: Payoff of 110 call option = Max ( Share price - 110 , 0 ) - Premium paid

Sell: Payoff of 100 call option = 2 * (Min(100- share price,0)+ premium received)

Overall Payoff = Payoff from 90 call buy + Payoff from 110 call buy + Payoff from 100 call sell

As per the below screenshot maximum loss = 2.77

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Consider: (a) Stock trades for $100; (b) Calls with exercise prices of $90, $100, and $110...
Consider: (a) Stock trades for $100; (b) Calls with exercise prices of $90, $100, and $110 trade at prices of $17.11, $10.69, and $6.10 respectively. If a person buys a $90 call, writes two $100 calls, and buys a $110 call, what is her higher break-even point? The answer is 108.17, how do you solve this?
Consider: (a) Stock trades for $100; (b) Calls with exercise prices of $90, $100, and $110...
Consider: (a) Stock trades for $100; (b) Calls with exercise prices of $90, $100, and $110 trade at prices of $17.78, $11.06, and $6.74 respectively. If a person buys a $90 call and writes a $110 call, what is her profit if the stock price is 92.63 at maturity? The answer is 8.41, how do you solve this?
A bond is convertible into 50 shares of common stock. The bond trades at 110 and...
A bond is convertible into 50 shares of common stock. The bond trades at 110 and the stock trades at $21. Which of the following are true? I. The stock trades above parity II. The stock trades below parity III. Converting the bond would be profitable IV. Converting the bond would not be profitable II & III I & III II & IV I & IV
. A stock sells for $110. A call option on the stock has an exercise price...
. A stock sells for $110. A call option on the stock has an exercise price of $105 and expires in 43 days. If the interest rate is 0.11 and the standard deviation of the stock’s return is 0.25. a) Calculate the call using the Black-Scholes model b) What would be the price of a put with an exercise price of $140 and the same time until expiration? c) How does an increase in the volatility and interest rate changes...
Consider a security with the stock prices S(1) = : 80 with probability 1/8 90 with...
Consider a security with the stock prices S(1) = : 80 with probability 1/8 90 with probability 2/8 100 with probability 3/8 110 with probability 2/8 (a) What is the current price of the stock for which the expected return would be 12%? (b) What is the current price of the stock for which the standard deviation would be 18%?
A stock sells for $110. A call option on the stock has exercise price of $105...
A stock sells for $110. A call option on the stock has exercise price of $105 and expires in 43 days. Assume that the interest rate is 0.11 and the standard deviation of the stock’s return is 0.25. What is the call price according to the black-Scholes model?
A stock sells for $110.A call option on the stock has an exercise price of $105...
A stock sells for $110.A call option on the stock has an exercise price of $105 and expires in 43 days.Assume that the interest rate is 0.11 and the standard deviation of the stock's return is 0.25 Required: What is the call price according to the Black Scholes model?
Use the following data to compute the option price for 3M: Stock price =100; Exercise price=90;...
Use the following data to compute the option price for 3M: Stock price =100; Exercise price=90; Interest rate=5%; Time to expiration= 3 months; Standard deviation = 20% per year; assume zero dividends. B) If the call option above is selling for $14.00 is its implied volatility more than or less than 20%?
A non-dividend paying stock sells for $110. A call on the stock has an exercise price...
A non-dividend paying stock sells for $110. A call on the stock has an exercise price of $105 and expires in 6 months. If the annual interest rate is 11% (0.11) and the annual standard deviation of the stock’s returns is 25% (0.25), what is the price of a European put option according to the Black-Scholes-Merton option pricing model. A call and put expire in 0.41 year and have an exercise price of $100. The underlying stock is worth $90...
Consider a call option with an exercise price of $110 and one year to expiration. The...
Consider a call option with an exercise price of $110 and one year to expiration. The underlying stock pays no dividends, its current price is $110, and you believe it has a 50% chance of increasing to $120 and a 50% chance of decreasing to $100. The risk-free rate of interest is 10% What is the hedge ratio? What is the value of the riskless (perfectly hedged) portfolio one year from now? What is the value of the call option...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT