You are an investment banker and are engaged in a number of transactions with the XYZ...

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You are an investment banker and are engaged in a number of transactions with the XYZ Company, which is listed on the London Stock Exchange. Details about the Company are given below: Share options on XYZ Company traded on NYSE-Euronext-LIFFE (All options have European-style exercise) Strike 1 2 Price month months 90 95 100 110 Calls 10.57 6.29 3.09 0.37 7.47 4.21 2.01 0.22 3 months 8.45 5.33 3.08 0.76 Puts 1 2 month months 0.19 0.89 2.67 9.91 1.19 2.89 5.65 13.78 Other information on the XYZ Company: Current share price = 100 Dividends expected: 4.5 pence in 1.8 months' time 5.2 pence in 7.8 months' time The volatility of XYZ Company's shares is 25 per cent per year. 3 months 1.79 3.62 6.30 13.86 The risk-free continuously compounded interest rate is 5 per cent per year for all maturities. Treat months as ¹/12th of a year. Using the data above, detail how you might undertake a covered-call write transaction using the exchange-traded options on XYZ Company, together with the benefits from undertaking such a transaction. If you thought the annual expected return on the stock should be 16 per cent (including dividends), what return could you expect to earn from the strategy? Show, using properly labeled payoff diagrams, the strategies you might undertake using traded options on XYZ Company to (a) create a bullish vertical spread, (b) a bearish vertical spread, (c) a volatility spread, (d) a credit spread, and (e) a zero-cost spread. You are an investment banker and are engaged in a number of transactions with the XYZ Company, which is listed on the London Stock Exchange. Details about the Company are given below: Share options on XYZ Company traded on NYSE-Euronext-LIFFE (All options have European-style exercise) Strike 1 2 Price month months 90 95 100 110 Calls 10.57 6.29 3.09 0.37 7.47 4.21 2.01 0.22 3 months 8.45 5.33 3.08 0.76 Puts 1 2 month months 0.19 0.89 2.67 9.91 1.19 2.89 5.65 13.78 Other information on the XYZ Company: Current share price = 100 Dividends expected: 4.5 pence in 1.8 months' time 5.2 pence in 7.8 months' time The volatility of XYZ Company's shares is 25 per cent per year. 3 months 1.79 3.62 6.30 13.86 The risk-free continuously compounded interest rate is 5 per cent per year for all maturities. Treat months as ¹/12th of a year. Using the data above, detail how you might undertake a covered-call write transaction using the exchange-traded options on XYZ Company, together with the benefits from undertaking such a transaction. If you thought the annual expected return on the stock should be 16 per cent (including dividends), what return could you expect to earn from the strategy? Show, using properly labeled payoff diagrams, the strategies you might undertake using traded options on XYZ Company to (a) create a bullish vertical spread, (b) a bearish vertical spread, (c) a volatility spread, (d) a credit spread, and (e) a zero-cost spread.

Answer rating: 100% (QA)

To undertake a covered call write transaction you would purchase the underlying stock in this case shares of XYZ Company and then sell or write call options on the same stock The goal of this strategy ... View the full answer