BBMF2073 FOREX AND DERIVATIVES

Tutorial 11: Introduction to Options

Question 1

Syarikat ABC stock is currently selling at RM 6.00 each. You are bullish about it and would like to take
a long position in the stock (buy). However, you are considering whether to buy Syarikat ABC stock
or a call option given that a call option on Syarikat ABC stock with an exercise price of RM 6.00 is
selling at 10 sen premium.

Advice whether long stocks or long call is appropriate for you and justify your answer with
appropriate illustration.

Question 2

Syarikat ABC stock is currently selling at RM 8.00 each. You are bearish about it and would like to
short it. However, you are considering whether to buy Syarikat ABC stock or a put option given that a
put option on Syarikat ABC stock with an exercise price of RM 8.00 is selling at 10 sen premium.

Advice whether short stock or long put is appropriate for you and justify your answer with
appropriate illustration.

Question 3

Stock CDE is selling at RM 7.00 each. You are bullish to neutral about it, and you decided to short the
put option, which is selling at 10 sen premium with exercise price of RM 7.00 each.

Draw the payoff with appropriate illustration.

Question 4

Stock CDE is selling at RM 10.00 each. You are bearish to neutral about it, and you decided to short
the call option, which is selling at 15 sen premium with exercise price of RM 10.00 each.

Draw the payoff with appropriate illustration.

Question 5

Assume a stock is trading at RM7.10 and RM7.00 call is trading at 0.21. How much time premium is
there in this call option?
 BBMF2073 FOREX AND DERIVATIVES

Question 6

XYZ Corp. current stock price= RM6.00

30-day call 30-day put

5.50 call= 0.70 5.50 put= 0.09
6.00 call= 0.30 6.00 put= 0.20
6.50 call= 0.08 6.50 put= 0.80

a) Which options are in-the money? By what amount?

b) Which options are at-the-money?
c) Would the premium of a 60-day option be higher or lower than the premium above if it
were (i) a call option, and (ii) a put option?