#### Details of this Paper

##### Assignment #5: Derivative Security Analysis Exerc...

**Description**

Solution

**Question**

Assignment #5: Derivative Security Analysis Exercise 1. The common stock of the Island Angler Corporation is currently trading at a price of $31 per share. Both a put and a call option are available for the stock, each having an exercise price of $30 and an expiration date in exactly six months. The current market prices for the put and call are $1.50 and $3.09, respectively. The risk-free holding period return for the next six months is 2 percent, which corresponds to a 4 percent annual rate. a. For each possible stock price in the following sequence, calculate the expiration date payoffs (net of the initial purchase price) for the following positions: (1) buy one Island Angler call option, and (2) short on Island Angler call option: 10, 15, 20, 25, 30, 35, 40, 45, 50 Draw a graph of these payoff relationships, using net profit on the vertical axis and potential expiration date stock price on the horizontal axis. Be sure to specfy the prices at which these respective positions will break even (i.e., produce a net profit of zero). b. Using the same potential stock prices as in Part a, calculate the expiration date payoffs and profits (net of the initial purchase price) for the following positions: (1) buy one Island Angler put option, and (2) short one Island Angler put option. Draw a graph of these relationships, labeling the prices at which these investments will break even. c. Determine whether the $1.59 difference in the market prices between the call and put options is consistent with the put-call parity relationship for European-style contracts. 2. You are a sugar dealer anticipating the purchase of 250,000 pounds of sugar in three months. You are concerned that the price of sugar will rise, so you take a long position in sugar futures. Each contract covers 112,000 pounds, and so, rounding to the nearest contract, you decide to go long in two contracts. The futures price at the time you initiate your hedge is 19.56 cents per pound. Three months later, the actual spot price of sugar turns out to be 20.65 cents per pound and the futures price is 20.85 cents per pound. a. Determine the effective price at which you purchased your sugar. How do you account for the difference in amounts for the spot and hedge positions? b. Describe the nature of the basis risk in the long hedge. 3. Suppose that one day in early April, you observe the following prices on futures contracts maturing in June: 97.65 for Eurodollar and 98.25 for T-Bill. These prices imply three month LIBOR and T-Bill settlement yields of 2.35 percent and 1.75 percent, respectively. You think that over the next quarter the general level of interest rates will rise while the credit spread built into LIBOR will narrow. Demonstrate how you can use a TED (Treasury/Eurodollar) spread, which is a simultaneous long (short) position in a Eurodollar contract and short (long) position in the T-Bill contract, to create a position that will benefit from these views. 4. In Mid-May, there are two outstanding call option contracts available on the stock of Hilltop, Inc. a. Assuming that you form a portfolio consisting of one Call #1 held long and two Calls #2 held short, complete the following table showing your intermediate steps. In calculating net profit, be sure to include the net initial cost of the options. b. Graph the net profit relationship in Part a, using stock price on the horizontal axis. What is (are) the breakeven stock price(s)? What is the point of maximum profit? c. Under what market conditions will this strategy (which is known as a ?call ratio spread?) generally make sense? Does the holder of this position have limited or unlimited liability? 5. Consider the following questions on the pricing of options on the stock of Hatters Yachts. a. A share of Hatteras Yachts sells for $65 and has a standard deviation of 20 percent. The current risk free rate is 4 percent and the stock pays two dividends: (1) $1.00 just prior to the option?s expiration date, which is 91 days from now (exactly one-quarter of a year); and (2) a $1.00 dividend 182 days from now (i.e., exactly one-half year). Calculate the Black-Scholes value for a European-style call option with an exercise price of $60. b. What would be the price of a 91-day European-style put option on Hatteras Yachts having the same exercise price? c. Calculate the change in the call option?s value that would occur if Hatteras? management suddenly decided to suspend dividend payments and this action had no effect on the price of the company?s stock? 6. Describe some of the ethical considerations of a financial manager selling collateralized debt obligations, such as sub-prime loans, to elderly clients.,Youi got my Table?,Here is some additional information about question 4.,Did you get the information that you needed?,I have to submit before 7.00pm today.. If you can then please let me know,If you can do Problem number 1,3,4 and 5 for me before 7.00 i will appreciate it.,Sorry Rachel, I dont need that answer anymore.

Paper#1830 | Written in 18-Jul-2015

Price :*$25*