UNIVERSITY OF THE WESTERN CAPE

2018

Medical Semester Test 2

MODULE NAME : INVESTMENT ANALYSIS

MODULE CODE : MAN308/680/780

DURATION: 90 minutes MARKS: 45

LECTURER: Samuel Enow

Question one [20]

Today is 15 September 2018. Use the following option quotes to answer the questions
below. You are required to show fully-labelled profit/loss graphs in your answer.

Everlasting Ltd Call Put

Spot Expiry Strike Premium (Contract) Premium (Contract)
120 15 Sep 2018 100 ??? ???

Note:
SA T-Bill rate = 10.25% p.a.
The share price of Everlasting is expected to move up by 15%; or down by 20%.

Using the data above, assume the options of Everlasting are efficiently priced based
on 1 stage binomial option pricing model, construct a protective put strategy (X =
100) on Everlasting that expires on 15 Sep 2019. Show fully-labelled profit/loss
diagrams and support your answers with appropriate option algebra attached to your
diagrams.

Question two [10]

Discuss the differences in writing covered and naked calls. Are risks involved in the
two strategies similar or different? Explain

Question three [10]

What is an option hedge ratio? How does the hedge ratio for a call differ from that of
a put? Explain.
Question four [10]

It is now October. The current interest rate is 5%. The March futures price for gold is
R846.30, whereas the August futures price is R860. Is there an arbitrage opportunity
here? If so, how would you exploit it? (Assume end of month prices)