question archive Veronique is also considering buying options
Veronique is also considering buying options
Subject:FinancePrice:2.86 Bought15
Veronique is also considering buying options. She buys the AB Inbev share at €45 and combines that with writing a call on AB Inbev with strike price €45 (option price is € 1.45 and maturity 6 months) and she buys a put with strike price €45 (option price is € 0.4 and maturity 6 months).
Graphically show the payoff at maturity of the options of this strategy (share combined with options). You do not have to take into account the cost price of the options.What is the price and yield to maturity of a zero coupon bond with a maturity of 6 months? Use the put-call parity (or assume a price to calculate the yield if you can't find the price).
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Given Information
|
Share Price (So) |
45 |
|
Call Price (c) |
1.45 |
|
Strike Price (X) |
45 |
|
Put Price (p) |
0.4 |
The payoff for each of the options and stock and net payoff are as given below in table and graph-
|
Payoffs |
Share Price at 6 months (S6<45) |
Share Price at 6 months (S6>=45) |
|
Share (Long) |
S6 |
S6 |
|
Call (Short |
0 |
-(S6-X) |
|
Put |
X-S6 |
0 |
|
Net |
X (=45) |
X (=45) |
Here, the payoff remains constant at $45.
Using put call parity, we have
P+So = c+X/(1+r)^n
Here maturity is at 6 months.
Let the Yield to Maturity be YTM
So, P+So = c+X/(1+r)^n
=> 0.4+45 = 1.45 + 45/(1+YTM/2)
On solving, we get YTM = 4.78%
Price of $100 par value zero coupon bond with maturity of 6 months = 100/(1+0.0478/2) = $97.67
Please see the attached file for the complete solution
