Chapter 5: Q7I (page 589)
What is the difference in cash flow between short-selling an asset and entering a short futures position?
Answer
Short selling results in immediate cash inflow while short future’s position does not
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
A call option on Jupiter Motors stock with an exercise price of \(75 and one-year expiration is selling at \)3. A put option on Jupiter stock with an exercise price of \(75 and one-year expiration is selling at \)2.50. If the risk-free rate is 8% and Jupiter pays no dividends, what should the stock price be?
Devise a portfolio using only call options and shares of stock with the following value (payoff ) at the option expiration date. If the stock price is currently $53, what kind of bet is the investor making?
You would like to be holding a protective put position on the stock of XYZ Co. to lockin a guaranteed minimum value of \(100 at year-end. XYZ currently sells for \)100. Overthe next year, the stock price will either increase by 10% or decrease by 10%. The T-billrate is 5%. Unfortunately, no put options are traded on XYZ Co.
a. Suppose the desired put option were traded. How much would it cost to purchase?
b. What would have been the cost of the protective put portfolio?
c. What portfolio position in stock and T-bills will ensure you a payoff equal to thepayoff that would be provided by a protective put with X = $100? Show that thepayoff to this portfolio and the cost of establishing the portfolio matches that ofthe desired protective put.
Suppose the value of the S&P 500 Stock Index is currently $1,200. If the one-year T-bill rate is 3% and the expected dividend yield on the S&P 500 is 2%, what should the one-year maturity futures price be? What if the T-bill rate is less than the dividend yield, for example, 1%?
Use the following case in answering Problems 10 – 15 :
Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio.
As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected.
BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at \(69. A call option on Smith & Oates with a strike price of \)70 is selling at $3.50 and has a delta of .69. What is the number of call options necessary to create a delta-neutral hedge?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
