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# Q 8.

25
1. Initial outlay = -\$4,000 + \$500 - \$700 = -\$4,200
If an investor buys 100 shares, shorts 100 call options, and buys 100 put options:
Profit (\$)

\$500

Long 100 shares

Short 100 call options

Stock Price
\$30

-\$700

Stock Price
range
S<30
30≤S<40
40≤S<50
S≥50

\$40

\$50

Long 100 put options

Payoff from long Payoff from short
put options
call options
30-ST
0
0
0
0
0
0
50-ST

Payoff from
long shares
ST-40
ST-40
ST-40
ST-40

Total
Payoff
-10
ST-40
ST-40
15

Profit
-52
ST-82
ST-82
-32

When ST>50, the loss of the short 100 call options will be covered by the profit of
long 100 shares and when ST<30, the long 100 put options will cover the loss of long
100 shares.
ii.

\$1. Q 11. and buys 200 put options: Profit (\$) Long 100 shares \$1000 Short 200 call options Stock Price \$30 -\$1400 Stock Price range S<30 30≤S<40 40≤S<50 S≥50 Payoff from long put options 30-ST 0 0 0 \$40 \$50 Long 200 put options Payoff from short call options 0 0 0 50-ST Payoff from long shares ST-40 ST-40 ST-40 ST-40 Total Payoff -10 ST-40 ST-40 15 Profit -52 ST-82 ST-82 -32 When ST>50. the loss of the short 100 call options will be covered by the long 100 shares which leaves the remaining short 100 call options naked and this will result in greater loss.Initial outlay = -\$4.400 If an investor buys 100 shares.000 + \$1000 . When ST<30.400 = -\$4. the loss of the long 100 shares will be covered by the long 100 put options which leaves the remaining long 100 put options naked and this will result in greater profit. shorts 200 call options.16 .

0) = max(42-48.84 \$50 0. Given X= \$48.96 Verifying no-arbitrage arguments & risk-neutral valuation The riskless portfolio is: Long: Δ shares Short: 1 call option \$50 B \$60Δ .0) = 12 fd = max(S-X.6162(12) + 0. 0) =0 f = e  rT [pfu + (1-p)fd] 6 = e  0.0) = max(60-48.12 6 e rT  d 12  0.2 \$50 d= \$42 = 0. It is known at the end of six months it will either be \$60 or \$42.A stock price is currently \$50.875 = \$42 A \$50 Option Value fu = max(S-X. Risk-neutral valuation: u= \$60 = 1.3838(0)] = 6.2  0. Calculate the value of a six-month European call option on the stock with an exercise price of \$48.3838 Node B Stock Price \$50 x 1.84 1 – p = 1 – 0. Verify that no-arbitrage arguments and risk-neutral valuation arguments give the same answer. The risk-free rate of interest with continuous compounding is 12% per annum.1212 [0.6162 = 0.12 C \$42Δ .0 A .84 = 0.6162 p= = e ud 1.125 = \$45 C \$50 x 0.

6667 – f = 26.2 Calculation of VaR . the value of the portfolio The value of portfolio is 0.The portfolio is riskless when: 60Δ – 12 = 42Δ 18Δ = 12 Δ = 0.37 The value of the stock today = \$50 Option price denoted = f The value of the portfolio today is: 50 x 0. 6 The value of the portfolio today is: 28 e  0. the risk-neutral valuation and no-arbitrage arguments give the same answer. which are 6.96 Q 18.6667) – 12 = 28 Given r = 12%.6667 despite of whether stock price moves up to \$60 or down to \$42 Long: 0.6667.1212 = 26.37 f = 6.6667 shares Short: 1 call option The value of the portfolio in 6 months is: 60Δ – 12 = 60(0.96 Thus.

96*5400=10.220.25 Thus.188.469.Standard deviation of the change in the portfolio value per day is therefore (5400) 2  (6000) 2  2 * 0.63.000 .25 Benefits of Diversifications Gold: one day 97. (33.6 * 5400 * 6000 = 10.5% VaR = 11.188.5% VaR = 1.69 Therefore.992 The 10-day 97.5% VaR is therefore: 10200*1.437. we are 97.000×0.55+37.96*6000 = 11.Standard deviation of the change in value of the investment in silver per day is \$500.5% VaR is 10 * 19.39).469.012=\$6.437.96=19.220.400 ..992= 63.220.760* 10 = 37.992= 63.760 10-day 97.Standard deviation of the change in value of the investment in gold per day is \$300.5% certain that we will not lose more than \$ 63.220.25=7. .200 Thus one day 97.55 Silver: one day 97.5% VaR = 1.5% VaR = 10584* 10 = 33.018=\$5.5% VaR is 10 * 19.69.39 Portfolio: 10-day 97.584 10-day 97.25497 in the next 10 days and the reduction through diversification is \$ 7.000×0.