Options - Payoff

1. Which one of the following statements about the value of a call option at expiration is false?
a. A short position in a call option will result in a loss if the stock price exceeds the exercise price.
b.The value of a long position equals zero or the stock price minus the exercise price, whichever is higher.
c.The value of a long position equals zero or the exercise price minus the stock price, whichever is higher.
d. A short position in a call option has a zero value for all stock prices equal to or less than the exercise price.

1. Turn back to Figure 15.1, which lists the prices of various IBM options. Use the data in the figure to calculate the payoff and the profits for investments in each of the following July maturity options, assuming that the stock price on the maturity date is $90.
a.Call option, X = 85
b. Put option, X = 85
c.Call option, X = 90
d.Put option, X = 90
e.Call option, X = 95
f.Put option, X = 95

Figure 15.1 Options on IBM, March 2, 2007
IBM (IBM) Underlying stock price: 90.90
Call Put
Expiration Strike Last Volume Open Interest Last Volume Open Interest
Mar 2007 85 7.50 172 1437 0.20 431 1487

Apr 2007 85 8.10 235 7167 0.70 455 10367
Jul 2007 85 9.40 27 1051 1.55 165 9914

Oct 2007 85 11.20 1 21 2.10 2 405
Mar 2007 90 2.20 3875 3088 1.05 8315 4649
Apr 2007 90 3.78 3779 7016 2.10 5499 11885
Jul 2007 90 5.50 108 1625 3.20 1067 2795
Oct 2007 90 7.70 114 159 ... ... 1003
Mar 2007 95 0.35 1605 28920 4.00 2365 27969 begin_of_the_skype_highlighting              00 2365 27969      end_of_the_skype_highlighting
Apr 2007 95 1.35 691 10348 4.90 3502 16796
Jul 2007 95 3.00 234 2805 5.20 3334 2780
Oct 2007 95 4.70 61 421 5.90

12. Use the spreadsheet from the Excel Application boxes on spreads and straddles (available at www.mhhe.com/bkm; link to Chapter 15 material) to answer these questions.
1. Plot the payoff and profit diagrams to a straddle position with an exercise (strike) price of $130. Assume the options are priced as they are in the Excel Application.
2. Plot the payoff and profit diagrams to a spread position with exercise (strike) prices of $120 and $130. Assume the options are priced as they are in the Excel Application.

13. The agricultural price support system guarantees farmers a minimum price for their output. Describe the program provisions as an option. What is the asset? The exercise price?
14. In what ways is owning a corporate bond similar to writing a put option? A call option?

Chapter 14 (1, 3 & 5)

Chapter 15 (1, 4, 12, 13 & 14)

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Answers questions on options.