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Law Intro

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Submitted By aasdkvnf
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Assignment 1:
Options, 55709 - Spring 2016
Hebrew University

• Submission Deadline: March 17, at the end of the class
• Please submit in groups of 2-3 students
• Mention clearly which question you are solving
• Keep answers concise and to the point
Problem 1 Trader A enters into a forward contract to buy gold for $1000 an ounce in one year.
Trader B buys a call option to buy gold for $1000 an ounce in one year. The cost of the option is $100 an ounce. What is the difference between the positions of the traders? Show the profit per ounce as a function of the price of gold in one year for the two traders.
Problem 2 A stock price is $29. An investor buys one call option contract on the stock with a strike price of $30 and sells a call option contract on the stock with a strike price of $32.50. The market prices of the options are $2.75 and $1.50, respectively. The options have the same maturity date. Describe the investor’s position (profit and payoffs)
Problem 3 The current price of a stock is $94, and three-month call options with a strike price of
$95 currently sell for $4.70. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2, 000 call options (20 contracts). Both strategies involve an investment of $9, 400. What advice would you give? How high does the stock price have to rise for the option strategy to be more profitable?
Problem 4 On March 7, 2016, an investor owns 100 Google shares. Find the close price of that date to determine what is the stock price. It can be find in numerous portals, for example yahoo finance.
A May put option with a strike price $690 costs $34.30. The investor is comparing two alternatives to limit downside risk. The first involves buying one May put option contract with a strike price of
$690. The second involves instructing a broker to sell the 100

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