Question

Problem 2-26

Refer to the stock options on Apple in the Figure 2.9. Suppose you buy a October expiration call option with exercise price $360.

a-1.	If the stock price in October is $370, will you exercise your call?
	Yes No

a-2.	What is the net profit/loss on your position? (Input the amount as a positive value.)

(Click to select)Net lossNet profit

$

a-3.	What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

Rate of return

%

b-1.	Would you exercise the call if you had bought the October call with the exercise price $355?
	Yes No

b-2.	What is the net profit/loss on your position? (Input the amount as a positive value.)

(Click to select)Net lossNet profit

$

b-3.	What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

Rate of return

%

c-1.	What if you had bought a October put with an exercise price of $360 instead? Would you exercise the put at a stock price of $360?
	Yes No

c-2.	What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

Rate of return

$  %

Answer 1

a-1	if the stock price is $ 370,exercise the call because we have the right to buy the stock.Since exercise price is less than stock price.
	EXERCISE THE CALL
a-2	net profit=stock price-exercise price-premium paid
	therefore net profit=370-360-0= $ 10
	Here no premium is given so it is assumed that premium is zero.Net profit will change according to premium paid
a-3	rate of return=net profit/exercise price
	10/360*100
	2.78%
b-1	if the stock price is $ 370 & exercise price is $ 355,exercise the call because we have the right to buy the stock.Since exercise price is less than stock price.
	EXERCISE THE CALL
b-2	net profit=stock price-exercise price-premium paid
	therefore net profit=370-355-0= $ 15
b-3	rate of return=net profit/exercise price
	15/360*100
	4.17%
c-1	Exercise price of a put option= $360
	stock price =$ 360
	Put option=right to sell the stock.
	Here will not exercise the put option since stock price and exercise price is same.
	net profit=stock price-exercise price-premium paid
	therefore net profit=360-360-0= $ 0
	Net profit will be negative since there will be premium paid
c-2	rate of return=net profit/exercise price
	0/360
	0%
	In this question premium amount is not given.Net profit and rate of return will change according to premium paid