Today, you purchased 100 shares of Lazy Z stock at a market price of $47 per share. You also bought a one year, $45 put option on Lazy Z stock at a cost of $0.15 per share. What is the maximum total amount you can lose on these purchases?
Maximum loss = 100 ($45 - $47 - $0.15) = -$215
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48.
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Today, you are buying a one-year call on Piper Sons stock with a strike price of $27.50 per share and a one-year risk-free asset which pays 4 percent interest. The cost of the call is $1.40 per share and the amount invested in the risk-free asset is $26.57. How much total profit will you earn on these purchases if the stock has a market price of $29 one year from now?
Profit = ($26.57 × 1.04) - $26.57 + ($29 - $27.50) - $1.40 = $1.16
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49.
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Today, you are buying a one-year call on one share of Webster United stock with a strike price of $40 per share and a one-year risk-free asset that pays 4 percent interest. The cost of the call is $1.85 per share and the amount invested in the risk-free asset is $38.46. What is the most you can lose on these purchases over the next year?
Maximum loss = ($38.46 × 1.04) - $38.46 + $0 - $1.85 = -$0.31
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50.
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A.K. Scott's stock is selling for $37 a share. A 3-month call on this stock with a strike price of $35 is priced at $3.40. Risk-free assets are currently returning 0.18 percent per month. What is the price of a 3-month put on this stock with a strike price of $35?
P = ($35/1.00183) + $3.40 - $37 = $1.71
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51.
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Cell Tower stock has a current market price of $62 a share. The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69. What is the risk-free rate of return?
$65/(1 + r) = -$7.16 + $62 + $7.69; r = 3.95 percent
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