Premium Essay

Options

In: Business and Management

Submitted By ShengyuZhang
Words 1137
Pages 5
Dear Professor Bhattacharya,

This is our written brief of case 1. As we misunderstood the instructions of question 5, we tried again to finish the problem properly. We just didn’t want to miss the great opportunity to practice our knowledge of the class so we worked on it independently. Thank you so much for your time and understanding.

Best regards,

Xiaolin Li, Shengyu Zhang, Riley David and Strick Jacob

CASE 1 BY GROUP 1
Xiaolin Li, Shengyu Zhang, Riley David and Strick Jacob

QUESTION 1
#1: Buying Calls * If ST < $55, we won’t exercise the call, and lose the premium of$2.875; * If ST > $55, we will exercise the call and the net profit will be ST - $55 - $2.875 = ST - $57.875

#2: Writing Calls * If ST < $55, the call buyer will not exercise the call, thus we earn the premium of $2.875; * If ST > $55, the call buyer will exercise the call and our net profit is $2.875 + $55 – ST = $57.875 - ST

#3: Buying Puts

* When ST > $55, we won’t exercise the put and will lose the premium of $2.625; * When ST < $55, we begin to earn money ($55 - ST – $2.625)

#4: Writing Puts

* When ST > $55, keep our premium of $2.625; * When ST < $55, need to purchase the stock, payoff is ST - $55 + 2.625

QUESTION 2
• Which one of the strategies offers the greatest upside return?
Buying calls since it can provide infinite profit as stock price grows.

• Which one of the strategies offers the least upside returns?
Writing puts because the most you can earn is your premium and premium of puts is lower than that of calls.

• Which one of the strategies offers the greatest downside potential?
Writing calls since when stock price reaches really high, your potential loss is infinite.

• Which one of the strategies offers the least downside potential?
Buying puts because the most you can lose is...

Similar Documents

Premium Essay

Options

...Futures and options serve different needs in the capital market and will forever be important elements on their own in every well diversified portfolio. A futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today (the futures price or strike price) with delivery and payment occurring at a specified future date, the delivery date. The contracts are negotiated at a futures exchange, which acts as an intermediary between the two parties. The party agreeing to buy the underlying asset in the future, the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the future, the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties—the buyer hopes or expects that the asset price is going to increase, while the seller hopes or expects that it will decrease in near future. Buyers of the futures contracts put up a fraction of the price of the underlying asset when the contract is entered upon. This upfront payment is like the down payment you pay when buying a house, which means that the futures contract itself does not come with a premium. Buyers and sellers of futures contracts are also obligated to fulfill the futures contract agreement upon expiration but not buyers and sellers of options contracts....

Words: 555 - Pages: 3

Free Essay

It Options

...You store and take pictures, videos, documents, and various other options. b) What changed from 1G cellular technology to 2G technology? The 2G technology change was that it included the use and implementation of all-digital transmission. This change was, “completely inadequate for web access, but it was good enough to introduce texting and the exchange of low-quality photographs.” (Panko, p.300) This helped take the phone business from a strictly voice option, to the introduction of text messaging. c) Compare typical 2G speeds with 3G speeds. There was a dramatic change in the speeds between 2G and 3G, which was somewhere in the region of 290 to 490 kpbs increase. The 2G speeds were roughly around 10 kpbs, but with the introduction of 3G technologies in the year 2000, changed the speed to 300-500 kpbs. d) What are likely to be typical download speeds for early 4G systems? The speeds that are projected and are the intended speeds are between 3 Mbps and 5 Mbps. e) What speeds will 4G support eventually? The next step in development will be the 4G systems and those should bring in speeds of around, “1 Gbps for stationary users and 100 Mbps for moving users.” (Panko, p.300) f) At what generation did video downloads and reasonably fast web access become feasible? The third-generation (3G) was the time when at least reasonable download speeds were attainable....

Words: 396 - Pages: 2

Premium Essay

Options

...Chapter 3 The Time Value of Money Solutions to Questions 1. A rate of return is the ratio of net cash inflows to net cash outflows produced by a financial contract. It is often expressed as a percentage. The ‘financial contract’ involved may be, for example, an investment in shares, land or bonds. An interest rate is a rate of return produced by debt of one form or another. Thus, an interest rate is one type of rate of return. Simple interest is a method of calculating interest in which the interest is computed on the basis of the original sum borrowed. Compound interest is a method of calculating interest in which interest is computed on the basis of the original sum borrowed plus interest owing but unpaid at the date of computation. The statement is true. The three different terms—‘present value’, ‘price’ and ‘principal’—all refer to the value of a financial contract at a given date (typically, today). ‘Present value’ tends to be used when the valuation is the result of a discounting procedure; ‘price’ tends to be used when the valuation is the result of a market transaction for a security and ‘principal’ tends to be used when the valuation refers to an amount lent by way of a standard loan. However, these circumstances are not independent; for example, a price may be offered and agreed to because a discounting procedure indicates to market participants that the price is the correct valuation. The term ‘nominal interest rate’ can mean an interest rate where interest is......

Words: 4475 - Pages: 18

Premium Essay

Option

...August 2012 Question 5 : Businesses need to implement response strategies to deal with Michael Porter’s Competitive forces. Discuss the FIVE response strategies and the role Information System/Information Technology plays in implementing these strategies. August 2010 Question 6: Companies need to develop policies to deal with Michael Porter’s competitive forces. Suggest FIVE such policies describing how information technology can be used to implement each of these policies. Dec 2010 Question 1: a) Companies need to develop policies to deal with Michael Porter’s five forces. Identify five such policies. b) Describe how information Technology (IT) can be used to implement these competitive policies. Dec 2009 Question 7) A company can survive and succeed in the long run only if it successfully implements competitive strategies to counter the threats of Michael Porter’s five competitive forces. What are these five basic competitive strategies? Briefly discuss each of these strategies highlighting how it can counter the threats of competitive forces? Answer Porter's five forces analysis is a framework for the industry analysis and business strategy development. It uses concepts developed in Industrial Organization (IO) economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. This model for analyzing the different external competitive forces that effects an organisation and how information can be used to counter......

Words: 598 - Pages: 3

Premium Essay

Options Market

...Options Markets Options Markets Prepared By: Daniel Bielewicz Jomark Manglicmot Juan Mendez December 1, 2014 Prepared By: Daniel Bielewicz Jomark Manglicmot Juan Mendez December 1, 2014 Table of Contents Page Introduction 2 Options Market 2 Market Makers 4 Equity Market 6 Conclusion 9 Works Cited 10 Introduction The options market is directly linked to the U.S. economy in many ways. It plays a huge role in various markets and institutions and is reflective of its underlying assets. In this case we will discuss the various issues regarding the options market and how it affects U.S. markets and institutions. This includes a breakdown of the options market, the market makers’ role, and how the options market affects the equity market. Options Market Nowadays, many investors’ portfolios include investments such as mutual funds, stocks, and bonds. But that is not all there is for investors to invest in. Another method of investment is called options, and it brings a world of opportunities for investors. However, options are complex securities and can be extremely risky.  Options, as the name implies, give the option to the buyer to either sell or buy a stock for a given price. The right to buy stock at a given price is called a “call option” and the right to sell it is called “put option”....

Words: 2751 - Pages: 12

Premium Essay

Real Options

...Using real options theory, managers can more effectively target crucial opportunities to redeploy, delay, modify, or even abandon capital-intensive projects as events unfold. Perhaps the most current and relevant companies utilizing the real options theories are found in the energy industry, especially in the development of alternative fuels. Real Options Theory Justified in Alternative Energy Business Planning Today’s fiercely competitive environment means that every player in the real business world must be pro-active. However, limited...

Words: 2529 - Pages: 11

Free Essay

Option Pricing

...On the other hand, when the stock price is negatively correlated with the volatility, the Black-Scholes formula overprices out-of-the-money options and underprices in-the-money options. Although these results are obtained for European call option, they can be directly used for European put options by applying the put-call parity equation. Furthermore, these results can be also applied for American call options on...

Words: 797 - Pages: 4

Premium Essay

Ltc Options

...Long Term Care Options: Don and Mary When a loved one is aging or ill the subject of long term care is discussed with family over dinner, with a social worker at a hospital, with friends at a neighborhood social. The dilemma of Don and Mary is faced by millions of families. According to Spencer, Patrick and Steele (2009) older adults would prefer to remain at home, although given several options, most would prefer not to be cared for by family and friends. What long term care options should Don consider for Mary and himself? Don is put in the position of having to explore options for long term care for his wife Mary and for himself. Based on the description of Mary’s illness, it appears she is in the severe stage of Alzheimer’s disease (AD) and requires total care of all functions including feeding, dressing, bathing (McSweeney-Feld & Oetjen, 2012, p71). People with Mary’s symptoms need the safe and structured around- the -clock care provided in a skilled nursing home facility. Don’s physical ailments have started to affect his ability to care for himself, although his mental faculties remain intact. An assumption is made that Don needs help in meeting some of his daily living needs such as meals, transportation to physician appointments, and probably the use of assistive living devices, such as a cane or walker for ambulation....

Words: 1555 - Pages: 7

Premium Essay

Real Option

...The course also provides an opportunity for the study of additional topics of special current significance such as capital structure and dividend policy, corporate restructuring and the market for corporate control, real options, risk management, international capital budgeting and financing, financial planning and working capital management, project financing, reorganizations and advanced equity valuation. Course Material Required text material • (BMA) R. A. Brealey, S. C. Myers and F. Allen, Principles of Corporate Finance, 8th ed., McGraw- Hill/Irwin, Inc., 2006. •(RP) Reading Packet •(CP) Case Packet The required text (BMA) and the materials that make up the Case Packet (CP) are available at the GSU Book Store. The Reading Packet (RP) is available at ERes. Contents of (CP) and (RP) (with ERes access instructions) follow at the end of this syllabus. The CD-ROM that comes with your text has the Financial Tutor Series with three modules, PowerPoint presentations for the text, Financial Analysis Spreadsheet Templates (F.A.S.T.) tied to specific problems in the text, video clips and Web links that make using this text easier and more fun. The website for this text is www.mhhe.com/bma8e and has in...

Words: 2563 - Pages: 11

Premium Essay

Strategic Options

...Strategicoptions | Internalconsistency | Externalconsistency | Feasibility | Competitiveadvantage | Option 1:Marketpenetration | * Consistent * Given the current strategic, operational and functional capabilities of ABL, it is evident that market penetration is highly consistent strategy. * Consistent with ABL’s key stakeholder requirements and strategic goals. * strong distribution channels and a highly automated warehousing and distribution systems, these systems will give the company an even greater advantage over its * competitors and provide solid base for continuing expansion. * its VMI system could respond quickly to change of customers’ demand * its bottling capacity could be used for its own manufacturing operations. * major manufacturing plant can process over one billion drinks per year * Using market data could enable responsiveness and flexibility | Consistent1, it is the second largestcompetitor in the broader nonalcoholicbeverage industry inAustralia, not far behind theleader.2, it has about 40% of thepackaged soft drink market inAustralia.3, there are still significantopportunities for growth in allnon-alcoholic beverages,Comparing with US.4, require achievement ofeconomies of scale - Theincreasing number ofacquisition will increasecompetition, as more and moreentities aim at reducing costand merging productionvolume....

Words: 1030 - Pages: 5

Premium Essay

Suicide, the Option

...Suicide, the Option Miguel Betances Informal Logic ACL1533D Michael Pankrast September 13, 2015 Death is a natural part of life yet comes with many conditions that may morally challenge someone who is sick or someone who is watching someone who is sick. Through death is inevitable for all, we all possess no pre-arranged expiration date, yet some wind up in scenarios which unconventional decisions may need to be made. Terminally ill patients are those who have been given said expiration date, with no chance at getting better, and the question arises as to whether or not it is acceptable to allow them to end pain or discomfort before their natural time of departure. Though terminally ill patients are not medical professionals and cannot determine their medical decline, they can feel it. Thus, physician-assisted suicide becomes an option, whereby, a terminally ill patient who can no longer stand pain or no longer wants to live out their “sentence” can go to said medical professional and calmly go in peace. However, this becomes a moral quandary, for who is to say whether or not it is okay for someone to kill themselves, even if they are in pain, even if they are assisted by a physician. Physician-assisted suicide is a viable option for terminally ill patients. The fact that the word “suicide” is used may create the wrong picture for those who oppose the concepts, because “suicide” implies a willingness to take a life not yet lived....

Words: 1197 - Pages: 5

Premium Essay

Real Options

...Chapter 13 ------------------------------------------------- Capital Budgeting: Estimating Cash Flow ------------------------------------------------- and Analyzing Risk ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS 13-1 The firm’s FCFs reflect both its past and current investments. Past investments produce current FCFs, but current investments are expected to add to FCF at some future point. Conceptually, a project’s projected cash flows and are expected to contribute that same amount to the firm’s future free cash flows. In practice, project cash flows are analyzed to determine what projects the firm will invest in, and then the sum of those investments, and the cash flows they produce, will in the future be reflected in the firm’s FCFs. If a firm identifies and then invests in positive NPV projects, this will increase the value of its operations as determined by the FCF model. The central issue is analyzing individual projects, and here the key factor is assessing the cash flows. See the BOC spreadsheet model. We go through the model to show how capital budgeting projects are analyzed. In this case, the initial NPV, IRR, and MIRR, all evaluated at the 12% average cost of capital and using the expected input values, indicate that the firm should accept the project. However, the risk analysis as done in the scenario analysis indicates that the project is riskier than average, hence the evaluation should be done with a somewhat higher......

Words: 12421 - Pages: 50

Premium Essay

Stock Options

...If a company has a stock option plan, compensation expense should be recorded during the period(s) in which the employee performs the services at the time the options are given. Holders are normally not allowed to exercise their options for a specific number of years because this delay provides an incentive for employees to stay with the company. In order to properly record the stock options Compensation Expense is debited, Stock Options is credited and cash remains unaffected by the amount of the...

Words: 712 - Pages: 3

Premium Essay

Real Options

...Real option analysis can capture the value of this increased flexibility, which previous methods have not been able to, such as the option to defer, abandon, expand or default a project. These options can be exercised when new information arrives and therefore provide an opportunity to put a floor on project loss. Use of binomial option pricing model gives managers a whole range of possibilities in analyzing the flexibility and to value the uncertainty in their investments. In this thesis the disadvantages of net present value and decision...

Words: 6715 - Pages: 27

Free Essay

Accreditation Options

...Accreditation Options Broaden for Acute Care Hospitals. Retrieved from...

Words: 274 - Pages: 2