Finance – Investment

Finance – Investment
1) Consider the information about a stock and its call options
A B C D
Months to exercise 6 6 6 9
Risk-free rate 12% 12% 12% 12%
Standard deviation of stock returns 40% 40% 40% 40%
Current stock price $65 $65 $65 $65
Exercise price $60 $62 $59 $59
Expected cash dividend No No No No

a) Without calculating the option prices, which call premium should be higher?
(1) A versus B
(2) A versus C
(3) C versus D
b) Calculate the Black-Scholes value for call A
c) What should be the value of the put with terms identical to those of A?
d) Develop an investment strategy for the following case: The pending contract award by the government
may cause stock A to advance or decline sharply within the next 4 months (hint: 3 answer – A compare to
B, A compare to C, A compare to D)

2) Given the current price of ZZZ stock was $40 and costs of options was as follows:
April
Strike Price Calls Puts
30 9 1
35 5 2
40 2 3
45 1 6

a) Construct a vertical call spread if your outlook on ZZZ were bearish between now and April.
Determine your maximum potential profit and maximum potential loss.
b) Construct a vertical call spread if your outlook on ZZZ were bullish between now and April.
Determine your maximum potential profit and maximum potential loss.
c) Construct a vertical put bull spread. Determine your maximum profit and maximum potential loss.
d) Construct a vertical put bear spread. Determine your maximum profit and maximum potential loss.
e) Construct a straddle if you expect ZZZ’s stock price will be either $60/share or $5/share. What
is your maximum potential loss? What is your profit if ZZZ’s stock price moves up to $60/share?
3) An option trader could have established a vertical call spread on QQQ by purchasing
QQQ/October/55 for $6/share and selling QQQ/October/60 for $4/share. QQQ stock is selling for
$61/share.
a. What is his investment?
b. Calculate gain/loss for the following cases:
i. The stock moves to $50
ii. The stock moves to $80
c. What is maximum potential profit?
d. What is maximum potential loss?
e. What is the risk/reward ratio?

4) Given the current price of SRB stock was $61.50 and cost of options was as follows:
Strike
Price Call Put
April July October April July October
50 13 ¼ 15 ½ 16 ¼ ¼ ½ 1
55 6 ½ 8 ½ 9 ½ ½ 1 ¼ 1 ½
60 4 5 ½ 6 ¼ 2 2 ½ 3
65 1 ½ 3 ¼ 4 ½ 5 ½ 6 ¼ 7

a) Construct a diagonal call bull-spread (No calculation)
b) Develop an investment strategy for the following case:
“Forthcoming R&D announcement will cause SRB stock either to advance sharply or decline sharply by
July.”

5) The current stock price of ATT is $22/share. Mr. A, who does not own any ATT stock, is
considering the following strategies:
a. Buy 100 shares of ATT stocks
b. Buy a call option ATT/4 months/23, selling for $6/share
c. Write a call option ATT/4 months/30 and receive a $5/share premium
d. Buy a put ATT/4 months/40, selling for $8/share
e. Write a put ATT/4 months/25 and receive a $5/share premium
Calculate the gain/loss for each strategy for the following cases:
1. ATT stock moves up to $23/share
2. ATT stock moves up to $50/share
3. ATT stock retreats to $10/share