Question: Problem 3 (32 points) You would like to construct a position that will have a constant ceiling on the total profit if stock price goes
| Problem 3 (32 points) | |||||||||
| You would like to construct a position that will have a constant "ceiling" on the total profit if stock price goes down | |||||||||
| and a constant "floor" on the total loss if the price goes up. Use must use two put options to achieve this result. | |||||||||
| You have access to two put options with the following characteristics: | |||||||||
| Option A: strike price of $40, the price of this put option is $3 per share. | |||||||||
| Option B: strike price is $35, the price of this put option is $2 per share | |||||||||
| Both options have the same time to maturity and can only be excercised on expiration date. | |||||||||
|
| |||||||||
| (a) Describe you position in the two put options. (8 points) | |||||||||
|
| |||||||||
| Given your answer in part a answer parts b, c, d and e about the combined position. | |||||||||
| (b) What is your total profit or loss per share if the stock price is $38 at expiration? (5 points) | |||||||||
|
| |||||||||
| (c.) What is your total profit or loss per share if the stock price is $5 at expiration? (5 points) | |||||||||
|
| |||||||||
| (d) What is your total profit or loss per share if the stock price is $50 at expiration? (4 points) | |||||||||
|
| |||||||||
| (e) Below draw the per share profit profiles for each of the options you have selected in part a | |||||||||
| and their combined (total) profit at expiration (label each axis, each profile and all breakeven points) | |||||||||
| (10 points) | |||||||||
Step by Step Solution
There are 3 Steps involved in it
1 Expert Approved Answer
Step: 1 Unlock
Question Has Been Solved by an Expert!
Get step-by-step solutions from verified subject matter experts
Step: 2 Unlock
Step: 3 Unlock
Study Help