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Chapter 15 - Options Markets
19. The Excel spreadsheet for both parts (a) and (b) is shown on the next page, and the
profit diagrams are on the following page.
a. & b.
15-1
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 15 - Options Markets
40 60 80 100 120 140 160 180 200 220
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
Bullish Spread
130 Straddle
20. The bondholders have, in effect, made a loan which requires repayment of B dollars,
where B is the face value of bonds. If, however, the value of the firm (V) is less than B,
21. The executive receives a bonus if the stock price exceeds a certain value, and receives
nothing otherwise. This is the same as the payoff to a call option.
22.
a.
Position ST < 165 165 < ST < 170 ST > 170
Short call 0 0 – (ST – 170)
b. Proceeds from writing options (from Figure 15.1):
15-2
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 15 - Options Markets
c. You will break even when either the short position in the put or the short
position in the call results in a cash outflow of $19.78. For the put, this requires
that:
d. The investor is betting that the IBM stock price will have low volatility.
23.
a.
b. The put with the higher exercise price must cost more. Therefore, the net outlay
to establish the portfolio is positive.
24. Buy the X = 62 put (which should cost more than it does) and write the X = 60 put.
Since the options have the same price, the net outlay is zero. The proceeds at maturity
will be between 0 and 2 and will never be negative.
Position ST < 60 60 < ST < 62 ST > 62
15-3
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 15 - Options Markets
26.
a.
Joe’s strategy Final Payoff
Position Initial Outlay ST < 1200 ST > 1200
Stock index
1,200
ST
ST
Chapter 15 - Options Markets
28. Buy a share of stock, write a call with X = 50, write a call with X = 60, and buy a call
with X = 110.
Position ST < 50 50 < ST < 60 60 < ST < 110 ST > 110
Buy stock STSTSTST
29. The farmer has the option to sell the crop to the government, for a guaranteed minimum
price, if the market price is too low. If the supported price is denoted PS and the market
CFA 2
Answer:
15-5
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 15 - Options Markets
a. Donie should choose the long strangle strategy. A long strangle option strategy
consists of buying a put and a call with the same expiration date and the same
underlying asset, but different exercise prices. In a strangle strategy, the call has
b. i. The maximum possible loss per share is $9.00, which is the total cost of the
ii. The maximum possible gain is unlimited if the stock price keeps moving
iii. The breakeven prices are $46.00 and $69.00. The put will just cover costs if
CFA 3
Answer:
a. If an investor buys a call option and writes a put option on a T-bond, then, at
maturity, the total payoff to the position is (ST – X), where ST is the price of the
b. Such a position would increase the portfolio duration, just as adding a T-bond
c. Futures can be bought and sold very cheaply and quickly. They give the manager
CFA 4
Answer:
a. Conversion value of a convertible bond is the value of the security if it is
b. Market conversion price is the price that an investor effectively pays for the
common stock if the convertible bond is purchased:
15-6
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 15 - Options Markets
Market conversion price = market price of the convertible bond/conversion ratio
CFA 5
Answer:
a. i. The current market conversion price is computed as follows:
Market conversion price = market price of the convertible bond/conversion ratio
ii. The expected one-year return for the Ytel convertible bond is:
iii. The expected one-year return for the Ytel common equity is:
b. The two components of a convertible bond’s value are:
i. In response to the increase in Ytel’s common equity price, the straight bond value
should stay the same and the option value should increase.
ii. In response to the increase in interest rates, the straight bond value should
decrease and the option value should increase.
15-7
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
