AAStore is a clothing retail department store located in the Eurozone that has struggled to make a
Question:
AAStore is a clothing retail department store located in the Eurozone that has struggled to make a profit during the pandemic due to long periods of lockdown in the country in which it operates.
The company is listed on the stock exchange and several hedge funds have sold the shares short in the expectation of making a profit on their position.
However, a number of retail investors have decided to buy AAStore shares or use call options to profit from an increase in value of AAStore shares.
On 1 May 2019, the opening price for AAStore shares was EUR 50 and option prices per AAStore share were as shown below:
1-day option Strike price (EUR)Premium
(EUR)
Call 555.00
Call 602.50
On 1 May 2019:
· Investor 1 invests EUR 2,000 by buying 40 AAStore shares.
· Investor 2 invests EUR 2,000 by buying 400 1-day call options on AAStore shares at a strike price of EUR 55.
· Investor 3 invests EUR 2,000 by constructing a 1-day bull spread on AAStore shares using the call options listed above.
Required:
(a) Construct a profit and loss table for each investor over one day for terminal share prices on 2 May 2019 in the range EUR 40 to EUR 70.
(b) Compare the results for each investor and discuss the different risk profile of each investment strategy. Illustrate your answer by drawing a graph (hand-drawn or using Excel, copied and pasted into this WORD document).
i think this is a bull spread or a bear spread which are part of option trading strategies .
will bull spread we gain if price rise moderately but protected from large loss. Bull spread is either 2 calls (short call and long call) or 2 puts (long put and short put)
bear spread: we gain if prices fall moderately but protected from large losses. it can be either 2 calls (short call and long call) or 2 puts (long put and short put).
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones