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Grand Canyon FIN451 week 6 Problem SET Solution

 

  1. Chapter 15: problem sets, numbers 10, 13, and 24, and CFA problems, number 4
  2. Chapter 16: problem sets, numbers 10, 11, 12, and 28

APA format is not required, but solid academic writing is expected.

Answers should be submitted using an Excel spreadsheet in order to show all calculations, where applicable.

You are not required to submit this assignment to Turnitin.

 

Answers should be submitted using an Excel spreadsheet in order to show all calculations, where applicable.
CHAPTER 15

  1. An investor purchases a stock for $38 and a put for $.50 with a strike price of $35. The
    investor sells a call for $.50 with a strike price of $40. What is the maximum profit and
    loss for this position? Draw the profit and loss diagram for this strategy as a function of
    the stock price at expiration.
    13. The common stock of the P.U.T.T. Corporation has been trading in a narrow price range
    for the past month, and you are convinced it is going to break far out of that range in the
    next three months. You do not know whether it will go up or down, however. The current
    price of the stock is $100 per share, the price of a three-month call option with an
    exercise price of $100 is $10, and a put with the same expiration date and exercise price
    costs $7. (L O 15-2)
    a. What would be a simple options strategy to exploit your conviction about the stock
    price’s future movements?
    b. How far would the price have to move in either direction for you to make a profit on
    your initial investment?
    24. A put option with strike price $60 trading on the Acme options exchange sells for $2. To
    your amazement, a put on the firm with the same expiration selling on the Apex options
    exchange but with strike price $62 also sells for $2. If you plan to hold the options position
    until expiration, devise a zero-net-investment arbitrage strategy to exploit the pricing
    anomaly. Draw the profit diagram at expiration for your position.
    4. Suresh Singh, CFA, is analyzing a convertible bond. The characteristics of the bond and
    the underlying common stock are given in the following exhibit:
    Convertible Bond Characteristics
    Par value $1,000
    Annual coupon rate (annual pay) 6.5%
    Conversion ratio 22
    Market price 105% of par value
    Straight value 99% of par value
    Underlying Stock Characteristics
    Current market price $40 per share
    Annual cash dividend $1.20 per share
    Compute the bond’s: (LO 15-3)
    a. Conversion value.
    b. Market conversion price.

CHAPTER 16
10. Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio
is perfectly hedged against: (LO 16-5)
a. Small price changes in the underlying asset.
b. Small price decreases in the underlying asset.
c. All price changes in the underlying asset.
11. After discussing the concept of a delta-neutral portfolio, Washington determines that he
needs to further explain the concept of delta. Washington draws the value of an option
as a function of the underlying stock price. Draw such a diagram, and indicate how delta
is interpreted. Delta is the: (LO 16-5)
a. Slope in the option price diagram.
b. Curvature of the option price graph.
c. Level in the option price diagram.
12. Washington considers a put option that has a delta of 2 .65. If the price of the underlying
asset decreases by $6, then what is the best estimate of the change in option
price?
28. According to the Black-Scholes formula, what will be the value of the hedge ratio of a
put option for a very small exercise price?

 

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