Derivative Securities and Markets

Question 1:- The price of a stock currently is $67. You sell 10 put option contracts on the stock with a strike price of $70 when the option price is $3.95 - $4.05 (This is Bid-Ask price quote!).

At the expiration the stock price is $65.50.

i. What is your PAYOFF? Show it algebraically as well as geometrically.

ii. What is your profit/loss, P/L? Show it algebraically as well as geometrically.

Question 2:- Rocket Inc. stock price is $100. The stock moves up each period by a factor of 1.2 and down by a factor of 0.8. Assume continuously compounded interest rate is 5% per period.

i. What is the two-period European put option value with exercise price of $102? [Show the evolution of the stock and put option prices!]

ii. What is the two-period American put option value with exercise price of $102?

[Show the evolution of the stock and put option prices!]

iii. What is the value of delta, Δ, of this option at up- and down-state at time one? How do you interpret them?