Investments, tenth edition

   SOLUTIONS TO CONCEPT CHECKS 

 E-INVESTMENTS EXERCISES 

    1.  Go to   www.nasdaq.com   and select  IBM  in the quote section. Once you have the infor-

mation quote, request the information on options. You will be able to access the prices 

for the calls and puts that are closest to the money. For example, if the price of IBM is 

$196.72, you will use the options with the $195 exercise price. Use near-term options. 

For example, in February, you would select April and July expirations.

    

 a.   What are the prices for the put and call with the nearest expiration date?  

   

 b.   What would be the cost of a straddle using these options?  

   

 c.   At expiration, what would be the break-even stock prices for the straddle?  

   

 d.   What would be the percentage increase or decrease in the stock price required to 

break even?  

   

 e.   What are the prices for the put and call with a later expiration date?  

   

 f.   What would be the cost of a straddle using the later expiration date? At 

 expiration, what would be the break-even stock prices for the straddle?  

   

 g.   What would be the percentage increase or decrease in the stock price required to 

break even?      

     1.      a.    Denote the stock price at call option expiration by  S  

 T 

 , and the exercise price by  X.   Value  at 

expiration  5   S  

 T 

   2   X   5   S  

 T 

   2  $195 if this value is positive; otherwise the call expires worthless. 

             Profit  5  Final  value  2  Price of call option  5  Proceeds  2  $3.65.  

S

T

 5 $185

S

T

 5 $205

Proceeds

 $0

$10

Profits

2

$3.65

$ 6.35

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P A R T   V I

  Options, Futures, and Other Derivatives

S

Payoff

Profit

Buy Call

S

Payoff

Profit

Write Put

S

Payoff

Profit

Write Call

S

Payoff

Profit

Buy Put

   b.   Value at expiration  5   X   2   S  

 T 

   5  $195  2   S  

 T 

  if this value is positive; otherwise the put expires 

worthless. 

     Profit  5  Final  value  2  Price of put option  5  Proceeds  2  $5.00.     

S

T

 5 $185

S

T

 5 $205

Proceeds

$10

$0

Profits

1

$ 5.00

2

$5.00

   2.  Before the split, the final payoff would have been 100  3  ($200  2  $195)  5  $500. After the split, 

the payoff is 200  3  ($100  2  $97.50)  5  $500. The payoff is unaffected.  

   3.      a.  

      

   b.   The payoffs and profits to both buying calls and writing puts generally are higher when the 

stock price is higher. In this sense, both positions are bullish. Both involve potentially taking 

delivery of the stock. However, the call holder will  choose  to take delivery when the stock 

price is high, while the put writer  is obligated  to take delivery when the stock price is low.  

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  C H A P T E R  

2 0

  Options Markets: Introduction

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  c.  The payoffs and profits to both writing calls and buying puts generally are higher when the 

stock price is lower. In this sense, both positions are bearish. Both involve potentially making 

delivery of the stock. However, the put holder will  choose  to make delivery when the stock 

price is low, while the call writer  is obligated  to make delivery when the stock price is high.     

   4.            

Slope = −2

Slope = 1

Payoff and

Profit

Payoff

Profit

− 2P − C

2X − 2P − C

X

2X

S

T