Problem 1/ For risk management purposes, “Bayan” decided to undertake a strategy consisting of selling a put with a strike price of 22.1098 for 2.11, selling a put with a strike price of 18.2451 for 0.56, and buy two puts with a strike price of 20.8931 for a total of 2.2488. She entered this position with 5000 contracts each contract containing 100 strategies that would expire in 3 months from now.

A/ What is the amount of her max loss?

QUESTION 2

b/ What is her gain/loss if the stock price in 3 months is 19.145?

-67,910

18,982

-56,238

88,717

47,630

19,872

  QUESTION 3

c/ What is her gain/loss if the stock price in 3 months is higher than the medium strike price by 350 basis points?

 

Profit / Loss from a short put position = P - max (K - S, 0)

Profit / Loss from a long put position = max (K - S, 0) - P

Hence, net profit loss from one strategy = 2.11 - max (22.1098 - S, 0) + 0.56 - max (18.2451 - S, 0) + 2 x max (20.8931 - S) - 2.2488 = 2 x max (20.8931 - S) - max (22.1098 - S, 0) - max (18.2451 - S, 0) + 0.4212

Hence, net profit / (Loss) from 5000 contracts each with 100 strategies = [2 x max (20.8931 - S) - max (22.1098 - S, 0) - max (18.2451 - S, 0) + 0.4212] x 5,000 x 100

Part (A)

Answer has already been provided. It is -39,775

Part (B)

Put S = 19.145 in the equation above,

Her gain / (Loss) = [2 x max (20.8931 - 19.145) - max (22.1098 - 19.145, 0) - max (18.2451 - 19.145, 0) + 0.4212] x 5,000 x 100 =  47,630

Hence, the correct answer is the fisth option.

Part (C)

S = Median strike price x (1 + 350 bps) = 20.8931 x (1 + 3.5%) = 21.6244

Her gain / (Loss) = [2 x max (20.8931 - 21.6244) - max (22.1098 - 21.6244, 0) - max (18.2451 - 21.6244, 0) + 0.4212] x 5,000 x 100 = -3,212