1.Suppose you enter into a long 6-month forward position at a forward price of $60. What is the payoff in 6 months for prices of $50, $55, $60, $65, and $70?

2.Suppose that instead you buy a 6-month call option with a strike price of $60. What is the payoff in 6 months at the same prices for the underlying asset?

3.Comparing the payoffs of parts (a) and (b), which contract should be more expensive (i.e., the long call or long forward)? Why is this so?

4.Suppose you enter into a short 6-month forward position at a forward price of $60. What is the payoff in 6 months for prices of $50, $55, $60, $65, and $70?

5.Suppose you buy a 6-month put option with a strike price of $60. What is the payoff in 6 months at the same prices for the underlying asset?

6.Comparing the payoffs of parts (a) and (b), which contract should be more expensive (i.e., the long put or short forward)? Why is this so?

7.Use the following premiums for S&P options with 6 months to expiration:

Strike Call Put

$950 $120.405 $51.777

1000 93.80974.201

1020 84.47084.470

1050 71.802101.214

1107 51.873137.167

Assume you buy a 1,000-strike S&P call, sell a 1050-strike S&P call, sell a 1,000-strike S&P put, and buy a 1050-strike S&P put.

a. Using a table, verify that there is no S&P price risk in this transaction.

b. What is the initial cost of the position?

c. What is the value of the position after 6 months?

d. What is the implicit interest rate in these cash ﬂows over 6 months?

8.Here is a quote from an investment website about an investment strategy using options:

One strategy investors are applying to the XYZ options is using “synthetic stock.” A synthetic stock is created when an investor simultaneously purchases a call option and sells a put option on the same stock. The end result is that the synthetic stock has the same value, in terms of capital gain potential, as the underlying stock itself. Provided the premiums on the options are the same, they cancel each other out so the transaction fees are a wash. (as cited in McDonald, 2013, question 3.19)

Suppose, to be concrete that the premium on the call you buy is the same as the premium on the put you sell, and both have the same strikes and times to expiration.

a. What can you say about the strike price?

b. What term best describes the position you have created? What is the shape of the profit diagram?

c. Suppose the options have a bid-ask spread. If you are creating a synthetic purchased stock and the net premium is zero inclusive of the bid-ask spread, where will the strike price be relative to the forward price?

d.If you create a synthetic short stock with zero premium inclusive of the bid-ask spread, where will the strike price be relative to the forward price?

e. Do you consider the “transaction fees” to really be “a wash”? Why or why not?

Complete your response in 3-5 pages using Microsoft Word or Excel. For calculations, you must show work to receive credit. Your well-written response should be formatted according to CSU-Global Guide to Writing and APA Requirements, with any sources properly cited. Upload your completed work to the Module 2 folder.

**Place your order now for a similar paper and have exceptional work written by our team of experts to guarantee you A Results**

**Why Choose US **

** 6+ years experience on custom writing**

** 80% Return Client**

** Urgent 2 Hrs Delivery**

** Your Privacy Guaranteed**

** Unlimited Free Revisions**

### You May Also Like This:

- Suppose the gold spot price is $1700/oz, the 1-year forward price is 1760.54, and the continuously compounded risk-free rate is 4%.
- ABC Corp. mines copper, with ﬁxed costs of $0.60/lb and variable cost of $0.30/lb. The 1-year forward price of copper is $1.10/lb. The 1-year effective annual interest rate is 6.2%
- Company has a $84 million portfolio with a beta of 1.2. The futures price for a contract on an index is 2100. Futures contracts on $250 times the index can be traded.
- Confirm that the binomial option price for an American call option is $18.283
- Derivatives-Finance
- 1.Suppose a company’s $50 stock pays an 8% continuous dividend and the continuously compounded risk-free rate is 6%.
- ssume you work for an oil company that deals with oil contracts and you are responsible for constructing those oil contracts
- Are the GCC countries still financially and economically strong after the recent fall in oil prices?
- Does Speculation of Futures of Food Commodities impact the Food Prices?
- Delta’s Hedging Program Assignment
- Technical and Cost or Price Evaluations and Price Reasonableness
- Frequency Distribution, Probabilities, and Expected Value SLP
- The first public sale of a company’s stock
- Jet fuel hedging
- Risk: Frequency Distribution, Probabilities, and Expected Value SLP
- conducting a job analysis of the Customer Service Representative position.
- BUS520-TD2-4-Business Analytics and Decision Making
- Cost of Capital
- derivative
- Time Value of Money Problems
- Annual returns
- Macro & Micro economics
- Arizona’s Position on Education Spending
- Volkswagen Company
- Homework Set
- Econ385
- Inclusive education in Saudi Arabia’s main stream schools: finding a way forward”
- corporate finance decisions
- types of potential borrowers
- Nominal versus Real Returns