SOAL 1

10. The initial outlay of this position is $51, the purchase price of the stock, and the
payoff of such position will be between two boundaries, $48 and $56.The maximum
profit will thusbe: $56 – $51 = $5, and the maximum loss will be: $48 – $51 = –$3.
Value
56

Payoff
48
Profit

5
ST
0 48 56
－3
SOAL 2
a.
Protective Put ST < 1040 ST > 1040
Stock ST ST
Put 1040 - ST 0
Total 1040 ST

Bills and Call ST < 1120 ST > 1120

Bills 1120 1120
Call 0 ST - 1120
Total 1120 ST

Payoff
Bills plus calls
(Dashed line)

1,120

1,040 Protective put strategy

(Solid line)

ST
0
1,040 1,120

b.

The bills plus call strategy has a greater payoff for some values of ST and never a
lower payoff. Since its payoffs are always at least as attractive and sometimes
greater, it must be more costly to purchase.

Protective Put ST = 0 ST = 1040 ST = 1120 ST = 1200 ST = 1280

Stock - 1,040 1,120 1,200 1,280
+ Put 1,040 - - - -
Payoff 1,040 1,040 1,120 1,200 1,280
Profit (168) (168) (88) (8) 72

Bills and Call ST = 0 ST = 1040 ST = 1120 ST = 1200 ST = 1280

Bill 1,120 1,120 1,120 1,120 1,120
+ Call - - - 80 160
Payoff 1,120 1,120 1,120 1,200 1,280
Profit (120) (120) (120) (40) 40

Profit

Protective put
Bills plus calls

1,040 1,120
0 ST
-120
-168

d.

The stock and put strategy is riskier. It does worse when the market is
down, and better when the market is up. Therefore, its beta is higher.
EKSTRA
a.

a. Maximum loss happens when the stock price is the same to

the strike price upon expiration. Boththe call and the put expire
worthless, and the investor’s outlay for the purchase of both
options is lost: $5.25 + $6.00 = $11.25

b.
Loss = Final value - Original investment
= (ST-X) - (C+P)
= 14 - 11.25
2.75

c.
a. There are two break even prices:
i. ST> X
(ST – X) – (C + P) = (ST – 70) – $11.25 = $0 ST = $81.25
ii. ST< X
(X –ST) – (C + P) = (70–ST) – $11.25 = $0 ST = $58.75