4. You own one Nov. 20 put options contact on Canadian dollar with K = $0.8050...

4. You own one Nov. 20 put options contact on Canadian dollar with K = $0.8050 for which you paid a premium of $0.01/C$. The spot exchange rate today is $0.7900. (i) How would you classify this option today, in-the-money or out-of-the-money? (ii) What is your profit/loss if you sell this option today if it is trading at a premium of $0.015/C$? Contract size is C$100,000 and the U.S. interest rate is 2%. Assume that you bought this option in Sept 20.

5. (a) What is the payoff profile of a buyer and a writer of an option?

(b) What causes option’s premium to change over time?

Solutions

Expert Solution

The payoff profile is a follows : -

Call buyer- call buyer makes a profit when the stock price moves away upside from the strike price. The higher the price moves, so does the premium. If the price is below the strike price, the option is not exercised and it lapses govong a loss of premium. Unlimited profit potential and loss is limited to premium paid.

Call writer - Call writer is in opposite side of call biyer. The max profits he can make is premium received thats only when the stock price is below the strike price. So unlimited loss potential and limited profit potential.

Put buyer - put buyer makes profits only when stock prices moves away downside the strike price. If the stock price is above the strike price, it is not exercised and lapses. Max lprofit is the strike price as it can not fall below 0. Max loss is premium paid.

Put writer:- put writer is in the opposite side of the put buyer. Max profit is the premium received and max loss is strike price.

Thumbs ups please.

Note:- you are allowed to ask one question at a time. Please dont downvote because of this. Pass on the other question.

Note :- in case of any query, use the space in comment section.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Bates Co. has purchased Canadian dollar put options for speculative purposes. Each option was purchased for...

Bates Co. has purchased Canadian dollar put options for speculative purposes. Each option was purchased for a premium of $.015 per unit, with an exercise price of $.78 per unit. Bates Co. will purchase the Canadian dollars just before it exercises the options (if it is feasible to exercise the options). It plans to wait until the expiration date before deciding whether to exercise the options. (1) What is the net profit or loss per unit to Bates Co. based...

one mole of ice at 0 C is put into contact with one mole of steam...

one mole of ice at 0 C is put into contact with one mole of steam at 100 C in an adiabatic enclosure. The pressure is held constant at one atmosphere. What is the final composition and temperature of the system?

Estimate the value of the Canadian dollar with respect to the US$ in one years time...

Estimate the value of the Canadian dollar with respect to the US$ in one years time .How did you estimate future exchange rates. Why do you think it would work?

Suppose that you buy 4 put options with strike price $50 at $5 each, and sell...

Suppose that you buy 4 put options with strike price $50 at $5 each, and sell 5 call options with strike price $31 at $2.5 each. a) What is your profit if the stock price at maturity is $41? b)What is your profit if the stock price at maturity is $52? c) What is your profit if the stock price at maturity is $30?

1. You own one call option and one put option on BP, both with a strike...

1. You own one call option and one put option on BP, both with a strike price of 230. The price of BP is 226. The interest rate is 3% and the time to expiration is six months. Graph on the same graph the value of the call and the put as the standard deviation of the price of Shell goes from 10 to 60 percent. (So that is two lines on the same graph.) Please include excel table and...

You own one call option and one put option on Shell, both with a strike price...

You own one call option and one put option on Shell, both with a strike price of 80. The interest rate is 5% and the time to expiration is nine months. The standard deviation of Shell is 25 percent. Graph on the same graph the value of the call and the put as the price of Shell goes from 70 to 130. (So that is two lines on the same graph.) Note:at least 50 data points on the graphs

EXERCISE #4: Optional: Put-Call Parity: C – P = S – PV(K), PV(K) = K /...

EXERCISE #4: Optional: Put-Call Parity: C – P = S – PV(K), PV(K) = K / (1+r) A-B. The stock is at 50. One-year interest rates are at 3%. A. A one-year call struck at 52 trades at $4. What must be the price of a one-year 52 put? $ ........................................................................... B. A one-year call struck at 50 trades at $5. What must be the price of a one-year 50 put? $ ........................................................................... C. The stock is at 51. The...

Consider the Black-Scholes formula for prices of European call and put options with strike K each,...

Consider the Black-Scholes formula for prices of European call and put options with strike K each, maturity T each on a non-dividend-paying stock with price S and volatility σ, with risk-free rate r. The formulas are written in terms of quantities d1 and d2 used to calculate the probabilities normal distribution. If the volatility of the stock becomes large and approaches infinity, (a) what values do d1 and d2 approach? (b) what value does the call price approach? (c) what...

Suppose the one year forward quote for the Canadian Dollar is 0.7642 USD = 1 CAD....

Suppose the one year forward quote for the Canadian Dollar is 0.7642 USD = 1 CAD. The spot quote is 0.7496 USD = 1 CAD. Canada has 7.07% one-year interest rates. If interest rate parity holds, what is the one-year interest rate in the U.S.?

4. You own an 8,000 ft^2 (K = 8,000) factory that produces N95 masks and you...

4. You own an 8,000 ft^2 (K = 8,000) factory that produces N95 masks and you produce them by combining labor and capital (your factory) as follows: Q = 4K^(1/3)L^(2/3), where Q is the number of masks produced per week. Assume there are many competing factories and all factories are identical. Until two months ago, the price of masks in this perfectly 1 competitive market was $1.50 each. Today the price is $3.00 ea. The rental value of your factory...

Subjects