29 Jun uestion Investment Analysis & Portfolio Management
Question
Investment Analysis & Portfolio Management
AD 717 OL
Homework Exercise 7 – Derivatives
1) On June 21, 2011, the GE’s stock closed at $18.81 per share. The accompanying table lists the prices for GE’s exchange-traded options. Using this data, calculate the payoff and the profit for each of the following September expiration options, assuming that at the September expiration the value of the stock was $17.72.
a) Call option X = $17
b) Put option x = $17
c) Call option x = $19
d) Put option x = $19
e) Call option x = $15
f) Put option x = $21
2. It is mid July. You believe that Walmart stock which is currently priced at $53.00 will appreciate significantly over the next several months. A long-term equity call option (LEAPS) with an expiry in mid January and a strike price of $52.50 is available at a price of $2.50. You have $10,600 to invest. You consider 4 alternatives:
a) Use your entire amount of funds to buy the stock outright
b) Use the entire amount to purchase the stock on margin. Assume that the minimum margin requirement is 50% and that you will pay 7% (annually) on borrowed funds.
c) Use the entire amount of funds to buy LEAPS call options with the January expiry date.
d) Buy options for 200 shares and use the rest of the money to buy government bills paying 1% per year. (hence figure on 6 months of interest).
For simplicity ignore any brokerage charges Calculate the net gain or loss from each strategy as of mid January assuming that the price of stock is:
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