The Topps Company has a $1 million funded pension plan for its employees. The portfolio beta is equal to 1.12. Assume the company sells (writes) 60 October 1100 (strike price) call option contracts on the S&P 500 Index as shown in Table 16–5 on page 426. Each contract trades in units of 100. At the time the options were written, the index had a value of 1,148.67.
a. What are the proceeds from the sale of the call options?
b. Assume the market goes down by 14 percent. Considering the portfolio beta, what will be the total dollar decline in the portfolio?
c. Assume the S&P 500 Index shown at the bottom of Table 16–5 also goes down by 14 percent at expiration. What will be the value of the index at that time?
d. Based on your answer to part c, what will be your profit on the option writes?
e. Considering your answers to parts b and d, what is your net gain or loss?