# Option Payoffs. Problems 11 through 16: Describe (as I have in 1-10) the strategy depicted by each payoff diagram. #11 #12 #13 #14 #15 #16

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1 Option s Problems 1 through 1: Assume that the stock is currently trading at \$2 per share and options and bonds have the prices given in the table below. Depending on the strike price (X) of the option or the face value (FV) of the bond, do the following: a) ketch the payoff and profit diagrams for the strategy. b) Describe the profitable range in terms of the price of the underlying security. c) Describe the maximum potential profits and losses. X or FV Call Premium Put Premium Bond Price \$ 5 \$ 15.6 \$.1 \$ hort one call, X=1; Long one bond, FV=1. 2. Long one call, X=2; hort one call, X=3. 3. Long one share of stock; short one call, X=2. 4. Long one put, X=15; Long one call, X= hort one put, X=15; Long one call, X=2. 6. Long one put, X=1; hort one put, X=2; Long one call, X=3. 7. hort one put, X=1; Long one put, X=2; hort one call, X=2. 8. Long two calls, X=25; hort one call, X=1; Long one bond, FV=1. 9. Long one put, X=1; hort one put, X=15; hort one call, X=25; Long one call, X=3. 1. hort one share of stock; hort one put, X=2; Long one bond, FV=25; Long one call, X=25. Problems 11 through 16: Describe (as I have in 1-1) the strategy depicted by each payoff diagram. #11 #12 # #14 #15 # Fi8 Practice et #1 1

5 4. uppose the time to expiration of an option decreases (as would happen as the option would get closer to expiration - while no other key variables change), what impact does this have on uppose that a stock currently trades for \$ You know that the true standard deviation of the stock's returns is exactly 41.5%. The call option expires in 7 days and has a strike price of \$75. The riskfree rate of return is 4.1%. The market price of the call is currently \$5.5. a) Is the market's assessment of the volatility of the underlying asset too high or too low? Why? b) What is the market's estimate of the volatility of the stock, according to the market prices of the call and the stock? Hint: You might need to use the 'olver' function in Microsoft Excel in order to 'back out' the implied 42. Use the Wall treet Journal or an internet quote service to obtain data for the following questions. For the riskfree rate of return, use the ask yield on the T-bill that matures in the same month (or closest) as the month of expiration for the options. a) Find an options contract on a 'Blue-chip' company (such as Boeing or General Electric). Using the market prices, determine the implied volatility (the sigma) that the market is using for the call option that is closest to being at-the-money and that expires in one to three months. Try not to use a firm that pays dividends. Hint: You will need to use the 'olver' function in Microsoft Excel in order to 'back out' the implied b) Find an options contract on an internet company. Using the market prices, determine the implied volatility (the sigma) that the market is using for the call option that is closest to being at-the-money and that expires in one to three months. Hint: You will need to use the 'olver' function in Microsoft Excel in order to 'back out' the implied c) Compare your answers to a and b above. Is this what you would expect? Why or why not? Fi8 Practice et #1 5

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