Depoul'' financial company purchased a call option on thr S&P 500 index expiring in one year...

Depoul'' financial company purchased a call option on thr S&P 500 index expiring in one year permuim is quoted at 20. the exercise price of the option is 1300 and the current price of the assume the index declines by 5% in the first quarter , then increase by 3 % in each of the follwing , what is the net gain or loss of this transaction ? hint: multiply index by 250$ to find the contract).

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Expert Solution

In Quarter 1 (Q1) there is decrease in 5%. Which means 100 - 5 = 95% is the price value. Similiarly there is increase of 3% in each Q2/Q3/Q4. There fore price will increase by 100 + 3 = 103% successively in each quarter. We can see table below

There at end of Q4 the option prices is $1350. The exercise price is $1300 + Option premium $20.

So the Net Transaction gain is $1350 - ( $1300 + $20) =~ $30 (roundoff)

Contract Gain = $250 * $30 =~ $7,500

jeff jeffy answered 1 year ago

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