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The common stock of Sophia Enterprises serves as the underlying asset for the following

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1) The common stock of Sophia Enterprises serves as the underlying asset for the following derivative securities: (1) forward contracts;(2) European style call options and (3) European style put options.;a) assuming that all Sophia derivatives expire at the same date in the future, complete a table similar to the following for;each of the following contract positions;(1) A long position in a forward with a contract price of $50;(2) A long position in a call option with an exercise price of $50 and a front end premium expense of $5.20;Expiration Date Sophia Expiration Date;Stock Price;Derivative Payoff;25;30;35;40;45;50;55;60;65;70;75;Initial Derivative;Premium;Net Profit;(3) A short position in a call option with an exercise price of $50 and a front end premium;receipt of $5.20.;In calculating net profit, ignore the time differential between the initial derivative expense or receipt and the terminal payoff.;b) Graph the net profit for each of the three derivative positions, using net profit on the vertical axis and Sophia's;expiration date stock price on the horizontal axis. Label the break even (i.e., zero profit) point(s) on each graph.;c) Briefly describe the belief about the expiration date price of Sophia stock that an investor using each of these three positions implicitly holds.;2) Refer once again to the derivative securities using Sophia common stock as an underlying asset discussed in Problem 1.;a. Assuming that all Sophia derivatives expire at the same date in the future, complete a table similar to the following;for each of the following contract positions;(1) A short position in a forward with a contract price of $50;(2) A long position in a put option with an exercise price $50 and a front end premium expense of $3.23;(3) A short position in a put option with an exercise price of $50 and a front end premium receipt of $3.23;Expiration Date Sophia Expiration Date;Stock Price;Derivative Payoff;25;30;35;40;45;50;55;60;65;70;75;Initial Derivative;Premium;Net Profit;In calculating net profit, ignore the time differential between the initial derivative expense or receipt and the;terminal payoff.;b. Graph the net profit for each of the three derivative positions, using net profit on the vertical axis and Sophia's expiration date stock price on the horizontal;axis. Label the breakeven (i.e., zero point(s) on each graph.;c. Briefly describe the belief about the expiration date price of Sophia stock that an investor using each of these three positions implicitly holds.

 

Paper#26952 | Written in 18-Jul-2015

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