Reference no: EM132953764
(a) Ethiraj the pension fund manager for Stark Corporation is considering purchase of a put option in anticipation of a price decline in the stock of Moondy Incorporation . The option to sell 100 shares of Moondy at any time during the next 90 days at a striking price of RM45 can be purchased for RM380. The stock of Moondy is currently selling for RM46 per share.
-Ignoring any brokerage fee or dividends, what profit or loss will Ethiraj make if he buys the option and the lowest price of Moondy stock during the 90 days is RM46 and RM35.
-What effect would the fact that the price of Moondy's stock slowly rose from its initial RM46 level to RM55 at the end of 90 days have on Ethis' purchase?
-In light of your findings , discuss the potential risks and returns from using put options to attempt to profit from an anticipated decline in share price.
(b) A trader believes that the KLCI market will fall in the future . Assuming in July the KLCI was trading at 1250. The trader bought the September KLCI put option at an exercise price of 1260 and a premium of 50 points . A month before the expiry date the KLCI dropped to 1110. As he waited the market to fall , the luck was not on his side , on the expiry date the market was still rising at 1280 .
Required:
-Prepare the pay- off diagram for the put option and show the break - even point if he took action on price at 1110.
-Calculate his current position if he did not take his action in (1) above.