BADM 430 International Finance – Option Prices and Payoff Problems

1. Suppose you bought 2 Xerox call contracts and one Xerox put contract both of which will expire in three months. The exercise price of the call is $70 and the exercise price pf the put is $75. Each option is sold as a 100 share contract.

a. What is your payoff of your investment if Xerox stock sells for $65 on the expiration date? What if it sells for $72? What if it sells for $80?

b. Draw the payoff diagram for the investment.

2. Use the Black-Scholes model and the program to price a call with the following characteristics:

Stock price = $60

Strike price = $70

Time to expiration = 4 weeks

Stock price variance = $36

Risk free interest rate = 5%

3. Find the price of the corresponding put option, that is a $70 put expiring in 4 weeks.