Consider the widget exchange. Suppose that each widget contract has a market value of $0 and a notional value of $100. There are three traders, A, B, and C. Over one day, the following trades occur:
· A long, B short, 5 contracts.
· A long, C short, 15 contract.
· B long, C short, 10 contracts.
· C long, A short, 20 contracts.
1. What is each trader’s net position in the contract at the end of the day?
2. What are trading volume, open interest, and the notional values of trading volume and open interest?
3. How would your answers in (1) and (2) have been different if there were an additional trade: C long, B short, 5 contracts?
4. How would you expect the measures in part (2) to be different if each contract had a notional value of $20?
Suppose the stock price is $40 and the effective annual interest rate is 8%.
1. Draw on a single graph payoff and profit diagrams for the following options:
· 35-strike call with a premium of $9.12.
· 40-strike call with a premium of $6.22.
· 45-strike call with a premium of $4.08.
2. Consider your payoff diagram with all three options graphed together. Intuitively, why should the option premium decrease with the strike price?
Construct an Excel spreadsheet that permits you to compute payoff and profit for a short and long stock, a short and long forward, and purchased and written puts and calls.
The spreadsheet should let you specify the stock price, forward price, interest rate, option strikes, and option premiums (you can chose arbitrary values). You must print the spreadsheet and include it to the assignment.
Construct payoff and profit diagrams for the purchase of a 950-strike S&R call and sale of a 1000-strike S&R call. Verify that you obtain exactly the same profit diagram for the purchase of a 950-strike S&R put and sale of a 1000-strike S&R put. What is the difference in the payoff diagrams for the call and put spreads? Why is there a difference?
Suppose you short the S&R index for $1000 and buy a 1050-strike call. Construct payoff and profit diagrams for this position. Verify that you obtain the same payoff and profit diagram by borrowing $1029.41 and buying a 1050-strike put.
A trader creates a bear spread by selling a 6-month put option with a $25 strike price for $2.15 and buying a 6-month put option with a $29 strike price for $4.75. What is the initial investment? What is the total payoff (excluding the initial investment) when the stock price in 6 months is (a) $23, (b) $28, and (c) $33.
For Questions IV and V, assume the effective 6-month interest rate is 2%, the S&R 6- month forward price is $1020, and use these premiums for S&R options with 6 months to expiration: