Reference no: EM131301141
Derivative Securities and Markets
Question 1:- The price of a stock currently is $67. You sell 10 put option contracts on the stock with a strike price of $70 when the option price is $3.95 - $4.05 (This is Bid-Ask price quote!).
At the expiration the stock price is $65.50.
i. What is your PAYOFF? Show it algebraically as well as geometrically.
ii. What is your profit/loss, P/L? Show it algebraically as well as geometrically.
Question 2:- Rocket Inc. stock price is $100. The stock moves up each period by a factor of 1.2 and down by a factor of 0.8. Assume continuously compounded interest rate is 5% per period.
i. What is the two-period European put option value with exercise price of $102? [Show the evolution of the stock and put option prices!]
ii. What is the two-period American put option value with exercise price of $102?
[Show the evolution of the stock and put option prices!]
iii. What is the value of delta, Δ, of this option at up- and down-state at time one? How do you interpret them?
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