Options Trading Seminar

Options Trading Seminar

 

Homework #1

 

Answer each of the following questions.  You must show how you got to your answers.

 

1. Find the prevailing rate of interest over the next 180 days if a Treasury bill maturing at that time has a bid price of 3.10 and an ask price of 2.9.

 

2. Amazing Spending Inc. stock is currently selling for $50. A 4-month option on the stock with an exercise price of 45 is selling for $9. Assume that you write the option.
3. a) What would be your maximum profit?
4. b) If S_T=62, would you earn a profit or suffer a loss?
5. c) How much?
6. d) If the stock price rises to $63 after 2 months, what would be your minimum loss?
7. Find the market interest rate if an at the money call on a stock selling for $60 cost $5 and an at the money put on the same stock cost $3. Both options expire in 1 year.
8. Find the maximum value of P (30,.75,35) if P (30,.75,25) =3.
9. Assume that a December 40 call is selling for $6 and a December 45 call on the same stock is selling for$1. The market rate of interest for that period is 10%.
10. a) How would you take advantage of these prices to create a guaranteed profit?
11. b) Find your profit if
12. I) S_T=37
13. ii) S_T=42

iii) S_T=48

 

6. XYZ stock is currently selling for$60. The current annual market interest rate is20%. What would be the minimum dividend needed to exercise C (60,.5,55) early?

 

 

 

 

 

 

 

 

 

 

 

 

Options Trading SeminarHomework #1

Page Two

 

7. Fin ethical Inc. is currently selling at $11.60 per share. The following chart lists some of the current options prices for Fin ethical:

CALLSPUTS

Exercise Price     December      January    March             December       January        March

102.30                                 1.50                        .55

12.50                     .75                          1.15        1.90        1.95                        2.75

15           .65                                          3.45        3.95                        5.75

Assume that the December, January, and March options have 2, 3 and 5 months to expiration, respectively, and that the monthly rate of interest is 1%

 

1. Find the intrinsic value of the Dec 10 call
2. Find the time value of the Dec 10 call
3. Find the minimum value of the Dec 10 call
4. Find the Maximum value of the March 10 call
5. Find the maximum value of the March 15 put
6. Find the intrinsic value of the Dec 10 put
7. Find the time value of the December 15 put
8. Find the lower bound of the January 10 call
9. Which of the above options are overpriced? Why?
10. Which of the above options are underpriced? Why?
11. If the January 10 option was selling for $1.30, how would you take advantage of this price?

 

8. A “don’t” option is an option that you pay for only if you don’t exercise the option by expiration. Should its price be greater or smaller than the price of a regular American option?  Justify your answer.