Case Study in Business Finance
Order ID 6463784949 Type Essay Writer Level Masters Style APA/MLA/Harvard/Chicago Sources/References 6 Number of Pages 5-10 Pages Description/Paper Instructions
- Question 1
Adam Smith is a portfolio manager of Point72 Investments, a financial services organization based in the United States. Smith is thinking about using options to boost portfolio returns and reduce risk. Tommy Hilfiger, his junior analyst, agrees to assist him. In the table below, Hilfiger has compiled current market values and statistics for a number of instruments relating to Lotus stock.
European call option on Lotus stock $3 European put option on Lotus stock $3 Lotus stock price $50 Time to expiration of options 3 months Exercise price of options $50 Risk-free rate 10% Dividend to be paid in 3 months $3.32 According to the table, what will be the arbitrage profit per share without considering the transaction cost? (sample answer: $5.50)
- Question 2
Adam Smith is a portfolio manager of Point72 Investments, a financial services organization based in the United States. Smith is thinking about using options to boost portfolio returns and reduce risk. Tommy Hilfiger, his junior analyst, agrees to assist him. In the table below, Hilfiger compiled and summarized the relationship between a European call option and several factors that could affect the call option value.
Table
Impact of Increasing the Variables on call option value Variables Impact on call option value Stock price Increase Strike Price Decrease Maturity Increase Volatility Increase Interest rate Increase Dividend Increase Which of the relationships shown in the Table is incorrect? (Choose the best answer)
- Question 3
Suppose trader Jean is neutral on the market, which trading strategy (or strategies), will you recommend to him? (Choose the best answer)
- Question 4
Suppose trader Frank is moderately bearish on the market, which trading strategy (or strategies) will you recommend to him?
- Question 5
Adam Smith is a portfolio manager of Point72 Investments, a financial services organization based in the United States. Smith is thinking about using options to boost portfolio returns and reduce risk. Tommy Hilfiger, his junior analyst, agrees to assist him. Table 2 shows Hilfiger’s collection of current market prices and data for a number of instruments relating to Lotus stock. Which of the following should be Smith’s arbitrage strategy, according to Table 2? (Select the most appropriate response.)
Table 2
European call option on Lotus equity $3 European put option on Lotus equity $3 Lotus equity price $50 Time to expiration of options 3 months Exercise price of options $50 Risk-free rate 10% Dividend to be paid in 3 months $3.32 “
- Question 6
Y
You’ve decided to put up a butterfly options strategy because you’re neutral on the market. The following details are available to you: $6 is the cost of a one-month call with a strike price of $60. The cost of a one-month call with a strike price of $62.5 is $4, whereas the cost of a one-month call with a strike price of $65 is $3. These settings will be used to create a butterfly spread.a. How much would it cost to implement this strategy?(example response: $8.50)c. What is the strategy’s highest profit margin? (example response: $8.50)c. What is the biggest loss possible with this strategy?(example response: $8.50)d. What is the profit if the stock closes at $61 at the end of the day?(example response: $8.50)g. What is the profit if the stock closes at $62 at the end of the day?(example response: $8.50)
- Question 7
At time T, a power call option pays off (max(ST-X, 0)2)2, where ST is the current stock price and X is the exercise price. The current stock price is $55. It is expected to be either $60 or $50 at the conclusion of the year. With constant compounding, the risk-free rate of interest is 6% per year. Calculate the value of a $55 exercise price one-year power call option.
a. What is the power call option’s delta?
(example response: 1.55 or 0.55)
c. What is the risk-neutral up-movement probability?
(as an example, 55.50 percent)
b. What is the power option’s worth? (example response: $15.50)
- Question 8
As a financial analyst at Bank of America Merrill Lynch, you’re tasked with gathering and evaluating data in order to determine the value of a six-month European call option and put option on BAC stock. The current stock price is $50. $50 is the strike price. It is expected to be either $55 or $45 at the conclusion of six months. The annual risk-free interest rate is set at 12%.
a. What is the delta of a call option?
(example response: 0.75)
c. What is the delta of the put option?
(example response: 0.75)
c. In a risk-neutral world, what is the chance of an upward movement?
(An example answer is 35.50%)
d. What is the value of the stock’s call option?
(example response: $2.50)
g. What is the value of the stock’s put option? (example response: $2.50)
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