FREE Trial

Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of

Question:

Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $95 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise price of $95 per barrel. Consider her gains and losses if oil prices are $90, $92, $95, $98, and $100. What do you notice about the payoff profile?


Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Answer rating: 75% (12 reviews)

The call options give the manager the right to purchase oil futures c...View the full answer


answer-question-section
Answered By
tutor-profile-image
CHARLES AMBILA
I am an experienced tutor with more than 7 years of experience. I have helped thousands of students pursue their academic goals. My primary objective as a tutor is to ensure that students have easy time handling their academic tasks.
5.00+ 109+ Reviews 323+ Question Solved
Related Book For  book-img-for-question
Corporate Finance

Corporate Finance

ISBN: 978-0077861759

10th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe

See More Books
Question Posted:
See More Questions

Related Video

A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

Students also viewed these Corporate Finance questions

Studies In Classification Data Analysis And Knowledge Organization Cooperation In Classification And Data Analysis 1st Edition - ISBN: 3642006671 - Free Book