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Consider options on Microsoft stock. Suppose that there are call options with a strike price of $10 and put options with a strike price of $10, both with the expiration date of January 16th. Suppose that there is a 50% chance that the stock price will be $13 on January 16th (Scenario A) and another 50% chance that it will be $9 on January 16th (Scenario B). Answer the following:

A) Compute the gross profit (i.e. disregarding option premium) of the call option and of the put option on January 16th under scenario A

B) Do the same for scenario B

C) Now consider the following portfolio: buying one share of the stock and buying a put option compute the value of the portfolio on January 16th under each scenario

D) How much would you be willing to pay for the call option now? For the put option? It is understood that there isn't enough info to get exact numbers but use approximate numbers showing how you came up with the numbers.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91237747

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