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Law Intro Essay

412 words - 2 pages

Assignment 1:
Options, 55709 - Spring 2016
Hebrew University

• Submission Deadline: March 17, at the end of the class
• Please submit in groups of 2-3 students
• Mention clearly which question you are solving
• Keep answers concise and to the point
Problem 1 Trader A enters into a forward contract to buy gold for $1000 an ounce in one year.
Trader B buys a call option to buy gold for $1000 an ounce in one year. The cost of the option is $100
an ounce. What is the difference between the positions of the traders? Show the profit per ounce as
a function of ...view middle of the document...

Describe the investor’s position (profit and payoffs)
Problem 3 The current price of a stock is $94, and three-month call options with a strike price of
$95 currently sell for $4.70. An investor who feels that the price of the stock will increase is trying
to decide between buying 100 shares and buying 2, 000 call options (20 contracts). Both strategies
involve an investment of $9, 400. What advice would you give? How high does the stock price have
to rise for the option strategy to be more profitable?
Problem 4 On March 7, 2016, an investor owns 100 Google shares. Find the close price of that date
to determine what is the stock price. It can be find in numerous portals, for example yahoo finance.
A May put option with a strike price $690 costs $34.30. The investor is comparing two alternatives
to limit downside risk. The first involves buying one May put option contract with a strike price of
$690. The second involves instructing a broker to sell the 100 shares as soon as Googles price reaches
$690. Discuss the advantages and disadvantages of the two strategies.
Problem 5 A trader buys a European call option and sells a European put option. The options
have the same underlying asset, strike price and maturity. Describe the traders position. Under what
circumstances does the price of the call equal the price of the put?

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