Calculate the initial cash flow

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Reference no: EM133377543

Question: Anticipating higher share prices, investor A BUYS one futures contract on Amazing.net with expiration date of September and a price of $35 per share. In September, the investor will accept delivery of 100 shares of Amazing.net and pay $35 per share. The investor does not pay anything on the futures contract until she gets the shares.

To protect against a decline in Amazing.net share prices, investor A also BUYS one European PUT option on 100 shares of Amazing.net with an exercise price of $35 per share, and expiration date of September. The current price of the option is $3 per share.

Anticipating higher share prices, investor B BUYS one European CALL option on 100 shares of Amazing.net with an exercise price of $35 per share, and expiration of September. The current price of the option is $3 per share.

For simplicity assume that the interest rate is zero and that the investors do not currently own any shares of Amazing.net. Calculate the initial cash flow, the break-even stock price at expiration and the maximum profits and losses for each investor. Which strategy is better?

Reference no: EM133377543

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