a. Suppose you enter into a long 6-month forward position at a forward price of $50. What
Question:
a. Suppose you enter into a long 6-month forward position at a forward price of $50. What is the payoff in 6 months for prices of $40, $45, $50, $55, and $60?
b. Suppose you buy a 6-month call option with a strike price of $50. What is the payoff in 6 months at the same prices for the underlying asset?
c. Comparing the payoffs of parts (a) and (b), which contract should be more expensive (i.e., the long call or long forward)? Why? Discuss in detail.
Strike PriceIn finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
Step by Step Answer:
a The payoff to a long forward at expiration is equal to Payoff to long forward Spot price at expira...View the full answer
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
Students also viewed these Corporate Finance questions
-
Suppose you buy one SPX call option with a strike of 1400 and write one SPX call option with a strike of 1450. What are the payoffs at maturity to this position for S&P 500 Index levels of 1350,...
-
Suppose you buy one SPX call option with a strike of 1400 and write one SPX put option with a strike of 1400. What are the payoffs at maturity to this position for S&P 500 Index levels of 1300, 1350,...
-
A four-month call option with $60 strike price is currently selling at $5. The underlying stock price is $59. The risk-free rate is 12% p.a. The put with same maturity and strike price is selling at...
-
The following is a comparative consolidated Statement of Financial Position for a particular firm X: Consolidated Balance Sheet (S in Millions) Current assets Cash and short-term investments Accounts...
-
The distribution of the ages of the winners of the Tour de France from 1903 to 2012 is approximately bell-shaped. The mean age is 28.1 years, with a standard deviation of 3.4 years. In Exercises 41,...
-
Does the auditor attempt to identify all accounting errors?
-
A rectangular channel has a gradual contraction in width from \(59 \mathrm{ft}\) to \(30 \mathrm{ft}\) and a bed level drop of \(6 \mathrm{in}\). below the upstream channel bed, which the increased...
-
Battery Limited uses a perpetual inventory system. The inventory records show the following data for its first month of operations: Calculate the cost of goods sold and ending inventory using (a)...
-
What is personal growth? What is personal growth as a children's pastor What is personal growth as a treasurer at a church What is personal growth as a pastor/ dealing with a supervised pastor...
-
Allie has bought a new apple orchard. The orchard has a single file of trees, numbered from 1 to N. Each tree has a certail number of ripe apples. Allie has a rule she wants to follow. She wants to...
-
What position is the opposite of a purchased call? The opposite of a purchased put?
-
a. Suppose you enter into a short 6-month forward position at a forward price of $50. What is the payoff in 6 months for prices of $40, $45, $50, $55, and $60? b. Suppose you buy a 6-month put option...
-
Solve the given systems of equations by using the inverse of the coefficient matrix. 2x + 4y = 9 (13) x y = 2
-
A group of fun-loving people have decided to play a practical joke on one of their friends, but they can't decide which friend, Alice (A), Betty (B), or Connie (C). Their preferences are: Use this...
-
Consider the following apportionment problem: Use the apportionment plan requested in Problems 46-50 assuming that there must be 26 representatives. HH's plan North: 18,200 South: 12,900 East: 17,600...
-
Use this information to answer the questions in Problems 46-49. The fraternity \(\Sigma \Delta \Gamma\) is electing a national president, and there are four candidates: Alberto (A), Bate (B), Carl...
-
Packard-Hue manufactures testing equipment at four locations, and has just hired 300 new employees. Those employees are to be apportioned using production levels at the four locations according to...
-
Use this information to answer the questions in Problems 46-49. The fraternity \(\Sigma \Delta \Gamma\) is electing a national president, and there are four candidates: Alberto (A), Bate (B), Carl...
-
Rectify the following errors: (a) Salary paid 5,000 was debited to employees personal account. (b) Rent Paid 4,000 was posted to landlords personal account. (c) Goods withdrawn by proprietor for...
-
A number of years ago the United Food and Commercial Workers Union organized 800 workers of the 1035 employees at one of the Wilson Brothers food operations in Toronto, Ontario. The employees include...
-
Compute estimated profit in 1 year if Telco buys a call option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case.
-
Compute estimated profit in 1 year if Telco sells a put option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case.
-
Construct Table 5.1 from the perspective of a seller, providing a descriptive name for each of the transactions. Pay at Time Description Outright purchase Receive Securitv at Time 0 0 Payment So at...
-
A) Translate the following C into RV641 assembly. Be sure to follow the calling (Refer to slide22 of lec6_postZoom.pdf) and comment each line of your assembly. Remember that long long is 64 bits in...
-
Given a Binary Tree, find the maximum sum path from a leaf to root. Input: 1 A Input: 10 -27 4 23 Output: Explanation Following the path 3-1, results in a sum of 4, which is the maximum path sum from...
-
On December 1 , 2 0 1 5 , your company pays $ 2 4 , 0 0 0 for rent on your store that covers the next 6 months. When you paid the cash, you debited Prepaid Rent.. The adjusting journal entry on...
Study smarter with the SolutionInn App