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In: Accounting

14. (Computing Exercise Values) You have a weird aunt who will give you one of the...

14. (Computing Exercise Values) You have a weird aunt who will give you one of the following options. They expire today, and each is an option on 100 shares. Compute the following?
a. A put option on Dell. The strike price is $30 and the stock price is $27.23
a. $0.00
b. $0.59
c. $1.29
d. $2.12
e. $2.77
f. $3.41
g. $4.15
h. $4.85
i. $5.25
b. A call option on GE. The strike price is $37.50 and the stock price is $32.60.
a. $0.00
b. $0.59
c. $1.29
d. $2.12
e. $2.77
f. $3.41
g. $4.15
h. $4.85
i. $5.25
c. A call option on Tyco. The strike price is $40 and the stock price is $23.30.
a. $0.00
b. $0.59
c. $1.29
d. $2.12
e. $2.77
f. $3.41
g. $4.15
h. $4.85
i. $5.25
d. A put option on Citi group. The strike price is $50 and the stock price is $45.85.

a. $0.00
b. $0.59
c. $1.29
d. $2.12
e. $2.77
f. $3.41
g. $4.15
h. $4.85
i. $5.25

Solutions

Expert Solution

I am calculating profit/loss (payoff) from the above positions, premium is ignored:

a. A put option on Dell. The strike price is $30 and the stock price is $27.23

(Premium is not given in the above situations so it is not taken into calculations)

Profit from Put option = Strike price - Spot price

Profit from Put option = 30 - 27.23

Profit from Put option: $2.77 per share, Total profit: 2.77 * 100 = $277

Option "e" is correct,

b. A call option on GE. The strike price is $37.50 and the stock price is $32.60.

Profit from Call option = Stock price - Strike price

In this question, Long call position is not having profit because stock price is less than strike price, axiu loss will be the premium, paid upfront to buy the option as the buyer will not exercise the option and let his position expire.

So option "a" is correct that says "0"

c. A call option on Tyco. The strike price is $40 and the stock price is $23.30

This is also the same situation as b. In this position, Investor is not getting profit but he is getting loss and his loss is limited to the extent of premium he paid for buying the call option.

So option "a" is correct that says "0"

d. A put option on Citi group. The strike price is $50 and the stock price is $45.85.

In this position, Investor is getting profit from Long Put.

Profit = 50 - 45.85

Profit: $4.15 per share, total profit: 4.15 * 100 = $415

Option "g" is correct that says, "4.15"

ekkarill92 answered 1 year ago
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