# Question

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?

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?

## Answer to relevant Questions

Assume that in problem 11 the firm had purchased 80 October 1100 put option contracts on the S&P 500 Index listed in Table 16–5 on page 426, instead of selling the call options. If the S&P 500 Index goes down by 14 percent ...Based on the information in Table 16–1on page 417, assume you buy a Nasdaq 100 December contract at the settle price. You hold the contract for one month and suffer a loss of $3,000. What is settle price after one month? In regard to the capital asset pricing model, comment on disagreements or debates related to RF (the risk-free rate) and KM (market rate of return). An investment has the following range of outcomes and probabilities: Calculate the expected value and the standard deviation (round to two places after the decimal point where necessary). What is a terminal wealth table? How is terminal wealth analysis different from the realized yield approach in Chapter 12?Post your question

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