Consider an exchange-traded call option contract to buy 500 shares with a strike price of $50...

Consider an exchange-traded call option contract to buy 500 shares with a strike price of $50 and maturity in four months. Explain how the terms of the option contract change when there is

A 10% stock dividend
A 10% cash dividend
A 5-for-1 stock split

Expert Solution

A. When the stock dividend will be declared, the overall number of shares of the call option are going to increase in the same proportion but the price of the option will be coming down in order to adjust for the same so the overall net result will be Similar, but the number of shares will go up and the price of the option will come down to adjust for the discrepancy.

B. when the 10% of cash dividend is declared it will mean that the overall value of the option strike price is going to come down by 10% because of the decrease in the value of the underlying asset

C. When there is a five for one stock split,it will mean that the investor will be having an additional share and the overall number of shares in the option will be going up but the price of the option will be coming down in order to adjust for any kind of increase in the number of shares so net effect will remain same.

in this case the total number of share will become 600 but the overall value of the option portfolio will remain 25000(600*41.466)

jeff jeffy answered 1 year ago

A European call option c with a strike price K of £50 is traded for £32....

A European call option c with a strike price K of £50 is traded for £32. The current value of the underlying asset S0 is £31. The interest rate r is 10% pa, and the time-to-maturity T is equal to six months. The underlying asset pays no dividends. a) Which of the arbitrage bounds does the option value violate? b) How would you profit from the violation of the arbitrage bound? Show the payoffs of your arbitrage strategy assuming that...

A call option with a strike price of $50 costs $2. A put option with a...

A call option with a strike price of $50 costs $2. A put option with a strike price of $45 costs $3. Explain how a strangle can be created from these two options. Construct a table that shows the payoff and profits of the strangle.

Option Strike Price $ Call Option Price $ Put Option Price $ 45 10.00 1.00 50...

Option Strike Price $ Call Option Price $ Put Option Price $ 45 10.00 1.00 50 5.00 2.00 55 1.50 3.00 60 1.00 7.50 Using the quotes from the table above, an investor makes the following transactions: (1) buys the stock at $55, and (2) writes the December Call with a strike price of $55. If the stock is selling for $62 per share, when the options expire, the profit from the trades is closest to a: . Multiple Choice...

Consider a 1-year European call option on 100 shares of SPY with a strike price of...

Consider a 1-year European call option on 100 shares of SPY with a strike price of $290 per share. The price today of one share of SPY is $285. Assume that the annual riskless rate of interest is 3%, and that the annual dividend yield on SPY is 1%. Both rates are continuously compounded. Finally, SPY annual price volatility is 25%. In answering the questions below use a binomial tree with two steps. a) Compute u, d, as well as...

Consider a call option on a stock, the stock price is $23, the strike price is...

Consider a call option on a stock, the stock price is $23, the strike price is $20, the continuously risk-free interest rate is 9% per annum, the volatility is 39% per annum and the time to maturity is 0.5. (i) What is the price of the option? (6 points). (ii) What is the price of the option if it is a put? (6 points) (iii) What is the price of the call option if a dividend of $2 is expected...

Suppose that a March call option on a stock with a strike price of $50 costs...

Suppose that a March call option on a stock with a strike price of $50 costs $2.50 and is held until March. Under what circumstances will the option be exercised? Under what circumstances will the holder of the option make a gain? Under what circumstances will the seller of the option make a gain? What is the maximal gain that the seller of the option can make? Under what circumstances will the seller of the option make the maximal gain?

Suppose you purchased two call option contracts (100 shares per contract) with $15 strike price at...

Suppose you purchased two call option contracts (100 shares per contract) with $15 strike price at a quoted price of $0.08 premium/share. What is your total profit on this investment if the price is $14.80 on the option expiration date?

URGENT ! Consider a call option on a stock, the stock price is $29, the strike...

URGENT ! Consider a call option on a stock, the stock price is $29, the strike price is $30, the continuously risk-free interest rate is 5% per annum, the volatility is 20% per annum and the time to maturity is 0.25. (i) What is the price of the option? (6 points) (ii) What is the price of the option if it is a put? (6 points) (iii) What is the price of the call option if a dividend of $2...

The price of a call option with a strike of $100 is $10. The price of...

The price of a call option with a strike of $100 is $10. The price of a put option with a strike of $100 is $5. Interest rates are 0 and the current price of the underlying is $100. Can you make an arbitrage profit? If so how? Describe the trade and your pay offs in detail. Part 2: The price of a call option with a strike of $100 is $10. The price of a put option with a...

A call option with strike price of $100 sells for $3 whereas a call option with...

A call option with strike price of $100 sells for $3 whereas a call option with strike price of $106 sells for $1. A ratio spread is a portfolio with the following characteristics: long on one call with Strike K1, shirt on 2 calls with Strike K2 (where K2>K1), Thsm, you create a ratio spread by buying one call option with the strike price of $100 and writing two call options with the strike price of $106. 1) perform a...

Question