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Options Profit Analysis: Problem 9.9: European Call Option Analysis

The document analyzes European call and put options, detailing their profit calculations, breakeven points, and graph interpretations. It also discusses the terminal value of a portfolio containing a long forward contract and a European put option, demonstrating that their combined value resembles a European call option. Additionally, it covers options trading cycles and calculations related to put-call parity and implied risk-free rates.

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12 views4 pages

Options Profit Analysis: Problem 9.9: European Call Option Analysis

The document analyzes European call and put options, detailing their profit calculations, breakeven points, and graph interpretations. It also discusses the terminal value of a portfolio containing a long forward contract and a European put option, demonstrating that their combined value resembles a European call option. Additionally, it covers options trading cycles and calculations related to put-call parity and implied risk-free rates.

Uploaded by

p4q7vdpwk6
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Options Profit Analysis

Problem 9.9: European Call Option Analysis


The option allows the holder to buy a share at $100.00.

The cost of the option (premium) is $5.00.

The option will be exercised if the stock price at maturity (S_T) is greater than $100.00,
since buying at $100 would be profitable.

The profit is calculated as:

Profit = max(S_T - 100, 0) - 5

The breakeven price occurs when:

S_T - 100 - 5 = 0 → S_T = 105

The option holder makes a profit when S_T > 105.

Graph Interpretation:
Below $100, the option is not exercised, and the loss is -$5 (the premium paid).

At $105, the profit/loss is zero.

Above $105, the profit increases as the stock price rises.

Problem 9.10: European Put Option Analysis


The option allows the holder to sell a share for $60.

The cost of the option (premium) is $8.

The option will be exercised if the stock price at maturity (S_T) is less than $60, since selling
at $60 would be profitable.

The seller (short position) profits when the option is not exercised or when the loss is less
than the premium received.

The profit for the short position is:

Profit = 8 - max(60 - S_T, 0)

The breakeven price occurs when:

8 - (60 - S_T) = 0 → S_T = 52

The seller makes a profit when S_T > 52.


Graph Interpretation:
Above $60, the maximum profit for the short seller is $8 (premium received).

At $52, the short position breaks even.

Below $52, losses increase as the stock price declines.

Problem 9.11: Terminal Value of a Portfolio


The portfolio consists of:

- A newly entered-into long forward contract on an asset.

- A long position in a European put option on the same asset.

- Both have the same maturity and a strike price equal to the forward price at setup.

The terminal value of the forward contract is:

S_T - F_0

The terminal value of the put option is:

max(F_0 - S_T, 0)

The total portfolio value is:

(S_T - F_0) + max(F_0 - S_T, 0)

which simplifies to:

max(S_T - F_0, 0)

This is identical to the payoff of a European call option with the same strike price and
maturity.

Problem 9.20: Options Trading on Given Dates


Options on General Motors stock follow a March, June, September, and December cycle.

(a) March 1: Options expiring in March, June, September, and December.

(b) June 30: Options expiring in June, September, December, and March of the following
year.

(c) August 5: Options expiring in September, December, March, and June of the following
year.
Chapter 10

Problem 10.14: Put-Call Parity Calculation


Given:

- Call price = $2

- Strike price = $30

- Stock price = $29

- Expected dividends = $0.50 (in 2 months and 5 months)

- Risk-free rate = 10%

- Time to expiration = 6 months

Using put-call parity:

C - P = S_0 - Ke^(-rT) + PV(Dividends)

Calculating the put price:

P = C - S_0 + Ke^(-rT) - PV(Dividends)

Problem 10.24: Implied Risk-Free Rate


Given:

- Call price = $20

- Put price = $5

- Stock price = $130

- Strike price = $120

- Time to maturity = 12 months

Using put-call parity:

C - P = S_0 - Ke^(-rT)

Solving for the implied risk-free rate r.

Problem 10.25: Arbitrage Opportunity


Given:

- Call price = $3

- Put price = $3
- Strike price = $20

- Stock price = $19

- Dividend = $1 (in one month)

- Risk-free interest rate = 10% per annum

- Time to expiration = 3 months

Using put-call parity and analyzing if an arbitrage opportunity exists.

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