Tutorial week 8

Question 1

Answer 1

Question 2

a. Construct a Straddle and a Strangle to take advantage of a potential increase in the volatility of EBAY’s stock price.

b. Which are the breakeven prices for each strategy?

Answer 2

Question 3

c. Show what happens to your profit using each strategy if the price i. stays at $75, ii. increases to $80, iii. falls to $65.

d. Explain the benefits and the dangers of selling a straddle or a strangle.

Answer 3

Question 4

Answer 4

Question 5

Answer 5

Question 6

Find the annual risk- free rate.

Answer 6

Question 7

If the annual risk-free rate is 3% and the put premium is unknown, find the put premium. (Assume everything else remains the same)

Answer 7

Share price + Put premium – Call premium = Exercise price/(1+ RFR)^n

201.3 + P – 112.17 = 185/(1 + 0.03)^2

P = 85.25

Question 8

If the annual risk-free rate is 4% and the call premium is unknown, find the call premium. (Assume everything else remains the same)

Answer 8

Question 9

If the annual risk-free rate is 5% and the share price is unknown, find the share price. (Assume everything else remains the same)

Answer 9

Question 10

Suppose that the initial values remain the same but the interest rate is either i. 1.2% or ii. 3.5%. Is there an arbitrage opportunity? If yes, how can you exploit it?

Answer 10

Question 11

Suppose that the interest rate is 2.3% but the call option sells for either i. $109 or ii. $115. Is there an arbitrage opportunity? If yes, how can you exploit it?

Answer 11