Class Note for MATH 368 at UA
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This 1 page Class Notes was uploaded by an elite notetaker on Friday February 6, 2015. The Class Notes belongs to a course at University of Arizona taught by a professor in Fall. Since its upload, it has received 16 views.
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Date Created: 02/06/15
Math 3681 Calls and Puts Spring 2008 Refer to Problem 1111 for some of the information needed to answer the questions below The point of this problem is as usual to see if you understand how to do this problem not to see if you can do the arithmetic So NO CALCULATORS for example if you come up with a number such as l 056 just leave it that way or perhaps simplify to l056 don t do the arithmetic For simplicity we will assume that we buy only ONE share of stock and correspondingly an option for only ONE share even though in real life you don t do this Reminder strike price exercise price 1 Suppose you buy now one share of BIGl stock and one put option as described in the problem a What is the present value of these purchases b Suppose 6 months from now you want to liquidate your position ie sell the stock andor exercise the option Describe and explain what happens NOTE Obviously the answer depends on the price ST of the stock at time T six months from now c How much are these purchases worth six months from now That is if you sold the stock andor exercised the option how much would you receive Explain in words based on what the purpose of a put option is don t look up a formula in the book NOTE Obviously the answer depends on the price ST of the stock at time T six months from now Consider two cases depending on whether ST gt the exercise price of the put option or ST S the exercise price of the put option 2 Suppose instead of proceeding as in the preceding problem you invest 100 in a bond or savings account which pays an effective annual rate of 5 and you also buy a call option same expiration date and strike price as the put option for BIGl at a price of 4 a What is the present value of these purchases b How much is the bond or savings account worth six months from now c How much is the call option worth six months from now Explain in words based on what the purpose ofa call option is don t look up a formula in the book NOTE Obviously the value of the call option depends on the price ST of the stock at time T six months from now Consider two cases depending on whether ST gt the exercise price of the call option or ST S the exercise price of the call option d What is the total worth of your total investment six months from now 3 Answer Problem 2d for the case where your 100 is invested in a financial instrument earning an annual interest rate of 5 compounded continuously
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