1. An investor sells a European call option with strike price of E and maturity T and buys a put with the same strike price and maturity on the same underlying asset.
- A. Create a payoff table of this position at expiration
- B. Show this payoff on a graph
2. The price of a non-dividend paying stock is $19 and the price of a three-month European call option on the stock with a strike price of $20 is $1. The risk-free rate is 4% per annum. What is the price of a three-month European put option with a strike price of $20?
3. The price of a European call which expires in 6 months and has a strike price of $30 is $2.00. The underlying stock's price is $29 and a dividend of $.50 is expected in 2 months and in 5 months. The term structure is flat with all risk free interest rates being 10%. What is the price of a European put option that expires in 6 months and has a strike price of $30? (Hint adjust the put call parity for dividends).
4. Three put options on a stock have the same expiration date and an exercise price of $55, $60, and $65. The market prices are $3, $5, and $8, respectively. Explain how a butterfly spread could be created. Construct a table showing the profit from the strategy. For what range of stock prices would the butterfly spread lead to a loss?
5. The price of a stock is $40. The price of a one-year European put option on the stock with a strike price of $30 is quoted as $7 and the price of a one-year European call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options.
- A. Construct a payoff and profit/loss table
- B. Draw a diagram illustrating how the investor’s payoff and profit or loss at expiation.