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Homework answers / question archive / FIN5DER Tutorial 11 Problem 12
FIN5DER
Tutorial 11
Problem 12.1.
What is meant by a protective put? What position in call options is equivalent to a protective put?
Problem 12.2.
Explain two ways in which a bear spread can be created.
Problem 12.3.
When is it appropriate for an investor to purchase a butterfly spread?
Problem 12.4.
Call options on a stock are available with strike prices of $15,$17.5 , and $20 and expiration dates in three months. Their prices are $4, $2, and,$0.5 respectively. Explain how the options can be used to create a butterfly spread. Construct a table showing how profit varies with stock price for the butterfly spread.
Problem 12.6.
What is the difference between a strangle and a straddle?
Problem 12.7.
A call option with a strike price of $50 costs $2. A put option with a strike price of $45 costs $3. Explain how a strangle can be created from these two options. What is the pattern of profits from the strangle?
Problem 12.8.
Use put–call parity to relate the initial investment for a bull spread created using calls to the initial investment for a bull spread created using puts.
Problem 12.9.
Explain how an aggressive bear spread can be created using put options.
Problem 12.10.
Suppose that put options on a stock with strike prices $30 and $35 cost $4 and $7, respectively. How can the options be used to create (a) a bull spread and (b) a bear spread? Construct a table that shows the profit and payoff for both spreads.
Problem 12.11.
Use put–call parity to show that the cost of a butterfly spread created from European puts is identical to the cost of a butterfly spread created from European calls.
Problem 12.12.
A call with a strike price of $60 costs $6. A put with the same strike price and expiration date costs $4. Construct a table that shows the profit from a straddle. For what range of stock prices would the straddle lead to a loss?
Problem 12.13.
Construct a table showing the payoff from a bull spread when puts with strike prices K1 and K2 with K2 > K1 are used.
Problem 12.14.
An investor believes that there will be a big jump in a stock price, but is uncertain as to the direction. Identify six different strategies the investor can follow and explain the differences among them.
A Modified Problem 19.20.
Suppose that $70 billion of equity assets are the subject of portfolio insurance schemes. Assume that the schemes are designed to provide insurance against the value of the assets declining by more than 5% within one year. [Making whatever estimates you find necessary, use the DerivaGem software to]
Calculate the value of the stock or futures contracts that the administrators of the portfolio insurance schemes will attempt to sell if the market falls by 23% in a single day. Without using any extra software to estimate the parameters, assume that as
r = 0.06, s = 0 25 and q = 0.03.
Problem 19.27.
A deposit instrument offered by a bank guarantees that investors will receive a return during a six-month period that is the greater of (a) zero and (b) 40% of the return provided by a market index. An investor is planning to put $100,000 in the instrument. Describe the payoff as an option on the index. Assuming that the risk-free rate of interest is 8% per annum, the dividend yield on the index is 3% per annum, and the volatility of the index is 25% per annum, is the product a good deal for the investor?
