Assignment 3: Portfolio revisions using options contracts

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Show full calculations and organize your answers.

Problem 1. A (20 points) Assume you are following a Call- Bill Strategy by building a portfolio consisting of $80,000 in Treasury bills and $20,000 in call options. Consider that the call options will rise by 60 percent at year end and Treasury bill return is 3 percent for the year. Calculate the resulting return on the portfolio. Problem 1 B

(20 pts) In part (a) above what would happen if stock prices do not change or the return in the stock market is zero? Calculate the return on the portfolio at year end (Treasury bill return will remain the same, 3%.