The Wall Street Journal reported the following prices for Microsoft options for trading on Friday, February 7
Question:
The Wall Street Journal reported the following prices for Microsoft options for trading on Friday, February 7 2010. The stock itself closed at $50.75.
1) If the risk free rate of interest (continuously compounded) is 5%, then does put- call parity hold for the April options with X=K=$50, and X=K=$65 (calculations based on 71 days to maturity, 365 day year)? 2a) Construct a payoff diagram for buying a $50 April call option on Microsoft. Construct the diagrams for net payoffs, i. e. after deducting the option premium. 2b) Construct a payoff diagram for writing a $50 April call option on Microsoft and for writing a $50 April put option (combined). Construct the diagrams for net payoffs, i. e. after adding the option premium.
Transcribed Image Text:
Calls (Prices in $) March July Strike Price February April 6.625 45 7.5 8. 10.5 5.875 50 2.8125 4.75 3.75 55 1.0625 2.625 6. 60 0.4375 1.3125 1.875 4.25 1.25 65 0.1875 0.625 70 0.0625 Puts (Prices in $) April Strike Price February March July 1.8125 45 2.625 4.25 50 2.375 4 55 5.375 7.625 8.125 8.75 60 9.75 10.875 12.5 15.5 65 16.5 16.75 70 20.75
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1 As per put call parity we have PC S Xert For XK50 we have Risk free rate 5 Call price is 5875 Apri...View the full answer
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A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price.
For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses.
It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.
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