BUS333 Derivative Securities
Workshop 1
Problem 1.35.
The current price of a stock is $94, and three-month call options with a strike price of $95 currently
sell for $4.70. An investor who feels that the price of the stock will increase is trying to decide
between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an
investment of $9,400. What advice would you give? How high does the stock price have to rise for
the option strategy to be more profitable?
The investment in call options entails higher risks but can lead to
higher returns. If the stock price stays at $94, an investor who buys
call options loses $9,400 whereas an investor who buys shares
neither gains nor loses anything. If the stock price rises to $120, the
investor who buys call options gains
2000 (120 95) 9400 $40 600
An investor who buys shares gains
100 (120 94) $2 600
The strategies are equally profitable if the stock price rises to a level,
S, where
100 (S 94) 2000(S 95) 9400
or S 100
The option strategy is therefore more profitable if the stock price
rises above $100.
1
, Problem 2.30.
What position is equivalent to a long forward contract to buy an asset at K on a certain date and a
put option to sell it for K on that date?
The equivalent position is a long position in a call with strike price K .
2
Workshop 1
Problem 1.35.
The current price of a stock is $94, and three-month call options with a strike price of $95 currently
sell for $4.70. An investor who feels that the price of the stock will increase is trying to decide
between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an
investment of $9,400. What advice would you give? How high does the stock price have to rise for
the option strategy to be more profitable?
The investment in call options entails higher risks but can lead to
higher returns. If the stock price stays at $94, an investor who buys
call options loses $9,400 whereas an investor who buys shares
neither gains nor loses anything. If the stock price rises to $120, the
investor who buys call options gains
2000 (120 95) 9400 $40 600
An investor who buys shares gains
100 (120 94) $2 600
The strategies are equally profitable if the stock price rises to a level,
S, where
100 (S 94) 2000(S 95) 9400
or S 100
The option strategy is therefore more profitable if the stock price
rises above $100.
1
, Problem 2.30.
What position is equivalent to a long forward contract to buy an asset at K on a certain date and a
put option to sell it for K on that date?
The equivalent position is a long position in a call with strike price K .
2
