Question

In: Finance

URGENT! From the following information, ascertain which option an investor prefer to choose for each securities....

URGENT!
From the following information, ascertain which option an investor prefer to choose for each
securities. Find out the profit and loss by opting or rejection.
Company Market price Expectation Striking price Premium
NDTV l 340 price decrease by 10% 400 50
P Ltd 260 increase by 9% 250 13
ITC Ltd 400 increase by 15% 430 60
TCS 1120 decrease by 10% 1000 100

call option and put option

Expert Solution

A call option is bought if the trader expects the price of the underlying to rise with in certain time frame.

A put option is bought if the trader expects the price of the underlying to fall within a certain time frame.

Accordingly:

For NDTV,investor will prefer a put option as there is expectation of fall in price.

Profit due to opting=Strike Price-Stock price-Premium

=400-(340*90%)-50=44

Loss due to rejection=if the investor opt a call option,then the option will be out of the money and investor will not excercise the option.Thus loss will be limited to premium amount,that is 50

ii)For P ltd,there is expectation of increase in price,hence investor will prefer a call option.

Profit=Stock price-strike price-Premium

=(260*109%)-250-13=20.40

Loss due to rejection=if the investor opt a put option,then the option will be out of the money and investor will not excercise the option.Thus loss will be limited to premium amount,that is 13

iii)For ITC,there is expectation of increase in price,hence investor will prefer a call option.

Profit=Stock price-strike price-Premium

=(400*115%)-430-60=0(profit cannot be negtive).In the given case,option is out of money,hence investor will not excercise the option.

Loss due to rejection=if the investor opt a put option,then the option will be out of the money and investor will not excercise the option.Thus loss will be limited to premium amount,that is 60

iv)For TCS there is expectation of fall in price,hence investor will prefer a put option.

Profit due to opting=Strike Price-Stock price-Premium

=1000-(1120*90%)-100=0(profit cannot be negtive)..In the given case,option is out of money,hence investor will not excercise the option.

Loss due to rejection=if the investor opt a call option,then the option will be out of the money and investor will not excercise the option.Thus loss will be limited to premium amount,that is 100

jeff jeffy answered 1 year ago

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