5. Suppose a spot price of a market index is $1000. After 6 months the market...

5. Suppose a spot price of a market index is $1000. After 6 months the market index is priced at 1020. The annual risk-free rate is 5%. The premium on the short put, with exercise price of 1050 is $10.

a. What is the profit at expiration for a short put? [4]

b. What is the intrinsic value of the short put in (i) above? [2]

Expert Solution

Answer a.

A short put occurs if a trade is opened by selling a put. For this the seller receives a premium for sell an option. The writer's profit on the option is limited to that premium received.

If a trader initiates a short put, they believe that the price of the underlying stock will stay above the strike price of the written put. If the price of the underlying stays above the strike price of the put option, the option will expire worthless and the writer gets to keep the premium. If the price of the underlying falls below the strike price, the seller faces potential losses.

In this case the strike price is 1050 for which writer receive $10 as premium.

After 6 months Market index is priscd at $1020.

So the Loss is = Strike price - price at expiration of option- Premium received

Loss= 1050-1020-10= $20

Answer 2

Intrinsic value of put option is the diference between the strike price and the underlying stock price.

In this case

Intrinsic value of option at the time of expiration is = $1050- $1020 =$30.

and

Intrinsic value of option at the time of short the put option: is = $1050-$1000= $50

jeff jeffy answered 2 years ago

Consider a 1000-strike put option on the S&R index with 6 months to expiration. At the...

Consider a 1000-strike put option on the S&R index with 6 months to expiration. At the time the option is written, the put writer receives the premium of $74.20. Suppose the index in 6 months is $1100. The put buyer will not exercise the put. Thus, the put writer keeps the premium, plus 6 months’ interest, for a payoff of 0 and profit of $75.68. If the index is $900 in 6 months, the put owner will exercise, selling the...

After 3 months the new spot price is R140. What will be the profit /loss to the long position in 3 months?

Given the information below.Spot = R100Risk-free rate = 10%Maturity = 1 yearAfter 3 months the new spot price is R140. What will be the profit /loss to the long position in 3 months?

Consider a 1000-strike put option and a forward contract on the S&R index with 6 months...

Consider a 1000-strike put option and a forward contract on the S&R index with 6 months to expiration. The current index price is $1000. The put writer receives the premium of $74.20 and the forward price is $1020. The annual interest rate is 4%. a. Verify that the S&R index price at which the profit diagram of the purchased put option intersects the x-axis is $924.32. b. At what price of the S&R index the long put option and the...

8. Suppose you are a market maker in S&R index forward contracts. The S&R index spot...

8. Suppose you are a market maker in S&R index forward contracts. The S&R index spot price is 1100, the risk-free rate is 5%, and the dividend yield on the index is 0. a. What is the no-arbitrage forward price for delivery in 9 months? b. Suppose a customer wishes to enter a short index futures position. If you take the opposite position, demonstrate how you would hedge your resulting long position using the index and borrowing or lending? c....

After 4 months the new spot price is R140. What will be the profit or loss to the short position in month 4?

Given the following information below.Spot = R100Risk-free = 10%Maturity = 1 yearAfter 4 months the new spot price is R140. What will be the profit or loss to the short position in month 4?

Suppose that the following risk-free spot rates prevail in the market: r1=4%, r2=5%, r3=6%, r4=6.5%, where...

Suppose that the following risk-free spot rates prevail in the market: r1=4%, r2=5%, r3=6%, r4=6.5%, where rT denotes the spot rate per annum on an investment with T years to maturity, quoted with annual compounding. You can borrow and lend at these rates. Let f(T1,T2) denote the annual forward rate, quoted with annual compounding, applicable to a forward rate agreement to borrow or lend money in T1 years from today until T2 years from today. Questions: Compute the forward rate...

Policy Perspective Suppose the monthly market demand schedule for Frisbees is Price $8 $7 $6 $5...

Policy Perspective Suppose the monthly market demand schedule for Frisbees is Price $8 $7 $6 $5 $4 $3 $2 $1 Quantity demand 1,000 2,000 4,000 8,000 16,000 32,000 64,000 150,000 Suppose further that marginal and average costs of Frisbee production for every competitive firm are Rate of output 100 200 300 400 500 600 Marginal cost $2.00 3.00 4.00 5.00 6.00 7.00 Average Cost $2.00 2.00 3.00 3.50 4.00 4.50 Finally, assume the equilibrium market price is $6 per frisbee...

Suppose the market index has a standard deviation of 0.40 and the riskless rate is 5%....

Suppose the market index has a standard deviation of 0.40 and the riskless rate is 5%. You are given the following information about two stocks X and Y: ? = [ 10% 20%], ???(??, ???????) = 0.096, ??? ???(??,???????) = 0.240. Suppose firm-specific errors are independent and identically distributed with a mean of zero and standard deviation of 0.5. a) What are the standard deviations of stocks X and Y? b) You were to construct a portfolio with the following...

Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price...

Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.4200 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.3640 Swiss francs per dollar. What is the nominal annual rate of return to the Swiss investor? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your...

6 months ago you bought a $5 call option on a stock with an exercise price...

6 months ago you bought a $5 call option on a stock with an exercise price of $60. What is the percentage return? If the stock price at expiration of this option is $54 If the stock price at expiration of this option is $72 6 months ago you bought for $3 a put option on a stock with an exercise price of $60, what is your return on investment? If the stock price at expiration of this option is...

Question