5. The common stock of Company XYZ is currently trading at a price of $42. Both a put and a call option are available for XYZ stock;each having an exercise price of $40 and an expiration date in exactly six months. The current market prices for the put and call are;$1.45 and $3.90, respectively. The risk free holding period return for the next six months is 4%, which corresponds to an 8% 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 XYZ call option, and (2) short one XYZ call option;20,25,30, 35,40,45,50,55,60;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 specify 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 XYZ put option, and (2) short one XYZ put option. Draw a graph of these relationships;labeling the prices at which these investments will break even.;c. Determine whether the $2.45 difference in the market prices between the call and put options is consistent with the put call parity;relationship for European style contracts.;Additional Requirements;Level of Detail: Show all work;Other Requirements: Please show all work, be detailed including showing all formulas used. Responses should be in excel.
Paper#26958 | Written in 18-Jul-2015Price : $27