Case
financial risk management
- Institution
- Abacus College, Oxford
financial risk management
[Show more]
Seller
Follow
Content preview
MANG 6020 Financial Risk ManagementSeminar 4
Question 1
Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until
maturity. Under what circumstances will the holder of the option make a profit? Under what
circumstances will the option be exercised? Draw a diagram illustrating how the profit from a
long position in the option depends on the stock price at maturity of the option.
Solution
Ignoring the time value of money, the holder of the option will make a profit if the stock price at
maturity of the option is greater than $105. This is because the payoff to the holder of the option
is, in these circumstances, greater than the $5 paid for the option. The option will be exercised if
the stock price at maturity is greater than $100. Note that if the stock price is between $100 and
$105 the option is exercised, but the holder of the option takes a loss overall. The profit from a
long position is as shown in Figure below.
Question 2
Suppose that a European put option to sell a share for $60 costs $8 and is held until maturity.
Under what circumstances will the seller of the option (the party with the short position) make a
profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how
the profit from a short position in the option depends on the stock price at maturity of the option.
Solution:
Ignoring the time value of money, the seller of the option will make a profit if the stock price at
maturity is greater than $52.00. This is because the cost to the seller of the option is in these
circumstances less than the price received for the option. The option will be exercised if the
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller 1097434525U. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £3.16. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
72841 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now