SCF is looking into buying some call options, i.e., the option to buy a stock at a future time. The option can be exercised one year from the time of purchase. SCF hopes that the stock price in one year will be higher than the option's strike price—the price at which SCF will have the right to buy the stock one year from now—so they gain cash by first buying the stock at a lower price and then selling it in the market at a higher price.

The current stock price is $163, and the SCF's estimate of the growth in the stock price over one year is 12%. In order to buy a call option with the strike price of $170, SCF has to pay $10 per option now, i.e., the premium (option price) is $10.

(a) Find the SCF's profit one year from now if they buy 1000 call options with strike price of $170.

(b) For this part, duplicate the worksheet you used for part  and continue your work on the new one. Now suppose SCF has decided that the growth rate will follow the probability distribution. Run a 200-trial simulation and build a histogram of the profit with 10 bins.

(c) Find (formulate a cell for) the expected (mean) profit and the standard deviation of the profit.

i) Growth Rate 8.00%.        i) Prob.   0.2

ii)Growth Rate 12.00%        ii) Prob. 0.6

iii) Growth Rate  15.00%.     iii). and Prob 0.2

Answer rating: 100% (QA)

a To calculate the profit one year from now we need to consider the different scenarios based on the ... View the full answer