Problem
20-6 on Call Options Based on Chapter 20
(Excel file included)
You own a call option on Intuit stock with a strike price
of $40. The option will expire in exactly 3 months’ time.
a) If
the stock is trading at $55 in 3 months, what will be the payoff of the call?
b) If
the stock is trading at $35 in 3 months, what will be the payoff of the call?
c) Draw
a payoff diagram showing the value of the call at expiration as a function of
the stock price at expiration.
Problem
20-8 on Put Options Based on Chapter 20
(Excel file included)
You own a put option on Ford stock with a strike price of
$10. The option will expire in exactly 6 months’ time.
a) If
the stock is trading at $8 in 6 months, what will be the payoff of the put?
b) If
the stock is trading at $23 in 6 months, what will be the payoff of the put?
c) Draw
a payoff diagram showing the value of the put at expiration as a function of
the stock price at expiration.
Problem
20-11 on Return on Options Based on Chapter 20
Consider the September 2012 IBM call and put options in
Problem 20-3. Ignoring any interest you might earn over the remaining few days’
life of the options, consider the following.
a) Compute
the break-even IBM stock price for each option (i.e., the stock price at which
your total profit from buying and then exercising the option would be 0).
b) Which
call option is most likely to have a return of −100%?
c) If
IBM’s stock price is $216 on the expiration day, which option will have the
highest return?
Problem
21-12 on Option Valuation Using the Black Scholes Model Based on Chapter 21
Rebecca is interested in purchasing a European call on a
hot new stock—Up, Inc. The call has a strike price of $100 and expires in 90
days. The current price of Up stock is $120, and the stock has a standard
deviation of 40% per year. The risk-free interest rate is 6.18% per year.
a) Using
the Black-Scholes formula, compute the price of the call.
b) Use
put-call parity to compute the price of the put with the same strike and
expiration date.
Problem
30-14 on Swaps Based on Chapter 30
Your firm needs to raise $100 million in funds. You can
borrow short-term at a spread of 1% over LIBOR. Alternatively, you can issue
10-year, fixed-rate bonds at a spread of 2.50% over 10-year treasuries, which
currently yield 7.60%. Current 10-year interest rate swaps are quoted at LIBOR
versus the 8% fixed rate.
Management believes that the firm is currently underrated
and that its credit rating is likely to improve in the next year or two.
Nevertheless, the managers are not comfortable with the interest rate risk
associated with using short-term debt.
a) Suggest
a strategy for borrowing the $100 million. What is your effective borrowing
rate?
b) Suppose
the firm’s credit rating does improve 3 years later. It can now borrow at a
spread of 0.50% over treasuries, which now yield 9.10% for a 7-year maturity.
Also, 7-year interest rate swaps are quoted at LIBOR versus 9.50%. How would
you lock in your new credit quality for the next 7 years? What is your
effective borrowing rate now?
Problem
30-6 on Futures Contract Based on Chapter 30
(Excel file included)
Your utility company will
need to buy 100,000 barrels of oil in 10 days, and it is worried about fuel
costs. Suppose you go long 100 oil futures contracts, each for 1,000 barrels of
oil, at the current futures price of $60 per barrel. Suppose futures prices
change each day as follows.
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a) What
is the mark-to-market profit or loss (in dollars) that you will have on each
date?
b) What
is your total profit or loss after 10 days? Have you been protected against a
rise in oil prices?
c) What
is the largest cumulative loss you will experience over the 10-day period? In
what case might this be a problem?
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