Question
In: Finance
Suppose you are a gas user, such as a chemical company, and want to put a...
Suppose you are a gas user, such as a chemical company, and want to put a ceiling on the price you will have to pay for gas in 3 months by longing a call with K=$5.00. To offset (approximately) the cost of the call, you short a put with K=$4.20. Calculate and graph the net price you will pay for your gas 3 months later when gas prices are $3.80, $4.00, $4.20, ....$5.20 including the future value of the option premiums
Solutions
Expert Solution
| Net Premium paid | $0 | |||||||
| (Assumed premium paid for buying a call =premium received for selling a put) | ||||||||
| Pay off for buying Call:K=$5.00 | ||||||||
| Price after 3 months =S | ||||||||
| If S>$5.00, | ||||||||
| Payoff =(S-5.00) | ||||||||
| If S=$5.00 or <$5.00, | ||||||||
| Payoff=$0 | ||||||||
| Pay off for Selling (Short)Put:K=$4.20 | ||||||||
| Price after 3 months =S | ||||||||
| If S<$4.20, | ||||||||
| Payoff =(S-4.20) | ||||||||
| If S=$4.20 or >$4.20, | ||||||||
| Payoff=$0 | ||||||||
| S | A | B | C=A+B | D=S-C | ||||
| Gain/(Loss) | Gain/(Loss) | Net Gain/ | Net Price | |||||
| Price at Expiration (S) | Buy Call K=$5.00 | Short Put K=$4.20 | (Loss) | Paid | ||||
| $3.80 | $0 | ($0.40) | ($0.40) | $4.20 | ||||
| $4.00 | $0 | ($0.20) | ($0.20) | $4.20 | ||||
| $4.20 | $0 | $0.00 | $0.00 | $4.20 | ||||
| $4.40 | $0 | $0.00 | $0.00 | $4.40 | ||||
| $4.60 | $0 | $0.00 | $0.00 | $4.60 | ||||
| $4.80 | $0 | $0.00 | $0.00 | $4.80 | ||||
| $5.00 | $0 | $0.00 | $0.00 | $5.00 | ||||
| $5.20 | $0.20 | $0.00 | $0.20 | $5.00 | ||||
| $5.40 | $0.40 | $0.00 | $0.40 | $5.00 | ||||
| $5.60 | $0.60 | $0.00 | $0.60 | $5.00 | ||||
 |
||||||||
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