Nine months ago, the price of a share of American Express (AXP) stock was $95, the price
Question:
Nine months ago, the price of a share of American Express (AXP) stock was $95, the
price of a nine-month European put option on the AXP stock with a strike price of
$90 was $8, and the price of a nine-month European call option on the AXP stock
with a strike price of $130 was $35. Suppose that an investor bought 100 shares,
shorted 100 call options, and bought 100 put options at that time. Now, at expiration, the price of a share of AXP stock is $147. The risk-free rate is 2% EAR.
Calculate the investor's payoff at expiration, as well as his profit/loss.
Hint: calculate the payoff and profit for each position and then calculate the total
payoff and profit. Assume there is an opportunity cost for the price paid on the underlying (similarly to the opportunity cost of the premium paid on the call and put
options).
Expert Answer:
Lets break down the investors positions and calculate the payoff and profit for each 1 Long 100 s... View the full answer
