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Chapter 20 Financial Options 6. You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time. is trading at $55 in three months, what will be the payoff of the call? b. If the stock is trading at $35 in three months, what will be the payoff of the call? If the stocl c. Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration, ie > Assume that you have shorted the call option in Problem 6. a. IF the stock is trading at $55 in three months, what will you owe? b. If the stock is trading at $35 in three months, what will you owe? c. Draw a payoff diagram showing the amount you owe at expiration as a function of the stock price at expiration. (X2| 8. You own a put option on Ford stock with a strike price of $10. The option will expire in exactly ix months’ time. a. If the stock is trading at $8 in six months, what will be the payoff of the pu? * b. If the stock is trading at $23 in six months, what will be the payoff of the put? c. Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration. x ° Assume that you have shorted the put option in Problem 8. a. If the stock is trading at $8 in three months, what will you owe? b. If the stock is trading at $23 in three months, what will you owe? c. Draw a payoff diagram showing the amount you owe at expiration as a function of thestodl price at expiration. 10. ‘What position has more downside exposure: a short position in a call or a short position i put? That is, in the worst case, in which of these two positions would your losses be greatel Consider the July 2009 IBM call and put options in Problem 3. Ignoring any interest might earn over the remaining few days’ life of the options: a. Compute the break-even IBM stock price for cach option (i.e., the stock price at which total profit from buying and then exercising the option would be zero). b. Which call option is most likely to have a return of —100%? c. If IBM's stock price is $111 on the expi ation day, which option will have the hi return? 12. — § 5 = 3 a r g & e & 2 2 2 3 E S g 5 Z e g a ° Es 8: g a = 5 a a exercise price of the call is $40 and the exercise price of the put is $45. Plot the valle combination as a function of the stock price on the exercise date. 13. You are long two calls on the same share of stock with the same exercise date. The exerel of the first call is $40 and the exercise price of the second call is $60. In addition, you two otherwise identical calls, both with an exercise price of $50. Plot the value of this nation as a function of the stock price on the exercise date. What is the name of this tion of options? *14, A forward contract is a contract to purchase an asset at a fixed price on a particular future. Both parties are obligated to fulfill the contract. Explain how to. construct contract on a share of stock from a position in options. 15, You own a share of Costco stock. You are worried that its price will fall and would yourself against this possibility. How can you purchase insurance against this posibi 16. It is July 13, 2009, and you own IBM stock. You would like to insure that the ¥. holdings will not fall significantly. Using the data in Problem 3, and expressing terms of a percentage of the current value of your portfolio: a. What will it cost to insure that the value of your holdings will not fall below between now and the third Friday in July? 
