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Financial Options Tutorial Questions

The document contains tutorial questions related to financial options, including calculations for call and put options for companies like Unilever, eBay, and IBM. It covers scenarios for buying and selling options, determining maximum gains, and verifying put-call parity. Additionally, it includes a question on pricing a call option based on a given put option and market conditions.

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Charles Cheng
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4 views3 pages

Financial Options Tutorial Questions

The document contains tutorial questions related to financial options, including calculations for call and put options for companies like Unilever, eBay, and IBM. It covers scenarios for buying and selling options, determining maximum gains, and verifying put-call parity. Additionally, it includes a question on pricing a call option based on a given put option and market conditions.

Uploaded by

Charles Cheng
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Tutorial Questions - Financial Options

Q1. Use the option quote information on Unilever NV from Euronext below to answer the questions
that follow. Assume that 100 Shares make 1 contract.

(a) Suppose you buy 20 contracts for the April €51.50 call option. How much will you pay, ignoring
commissions?

(b) In part (a), suppose that Unilever is selling for €52.50 per share on the expiration date. How much
is your options investment worth? What if the terminal share price is €50.50? Explain.

(c) Suppose you buy 10 contracts of the April €51 put option. What’s your maximum gain? On the
expiration date, Unilever is selling for €48 per share. How much is your options investment worth?
What is your net gain?

(d) In part (c), suppose you sell 10 of the April €51 put contracts. What is your net gain or loss if
Unilever is selling for €48 at expiration? What if the selling price is €54? What is the break-even
price – that is, the terminal share price that results in a zero profit?

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Q2. Consider the September 2018 eBay call and put options as follows:

eBay paid a dividend on 9th September 2018 and was not scheduled to pay another dividend until Feb
2019. Ignoring the negligible interest you might earn on T-Bills over the remaining few days’ life of
the options, show that the put-call parity holds for the September options with a $33 strike price.
Specifically:

(a) What is your profit/loss if you buy a call and T-Bills, and sell an eBay stock and a put option?

(b) What is your profit/loss if you buy an eBay stock and a put option, and sell a call and T-Bills?

(c) Explain why your answers to (a) and (b) are not both zero.

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Homework:

Q3. Consider the July 2018 IBM call and put options as follows:

IBM paid a dividend on 19th July 2018 and was not scheduled to pay another dividend until Nov 2018.
Ignoring the negligible interest you might earn on T-Bills over the remaining few days’ life of the
options, show that the put-call parity holds for the August options with a $140 strike price. Specifically:

(a) What is your profit/loss if you buy a call and T-Bills, and sell an IBM stock and a put option?

(b) What is your profit/loss if you buy an IBM stock and a put option, and sell a call and T-Bills?

(c) Explain why your answers to (a) and (b) are not both zero.

Q4. BP plc shares are currently selling for £4.29 per share. A put option with an exercise price of £4.40
sells for £0.25 and expires in three months. If the risk-free rate of interest is 2.6% per year, compounded
continuously, what is the price of a call option with the same exercise price?

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