FIN 451 All Weeks Problem Set
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1. Chapter 15: problem sets, numbers 10, 13, and 24, and CFA problems, number 4<br />
2. Chapter 16: problem sets, numbers 10, 11, 12, and 28<br />
APA format is not required, but solid academic writing is expected.<br />
Answers should be submitted using an Excel spreadsheet in order to show all calculations, where<br />
applicable.<br />
You are not required to submit this assignment to Turnitin.<br />
Answers should be submitted using an Excel spreadsheet in order to show all calculations, where<br />
applicable.<br />
CHAPTER 15<br />
10. An investor purchases a stock for $38 and a put for $.50 with a strike price of $35. The<br />
investor sells a call for $.50 with a strike price of $40. What is the maximum profit and<br />
loss for this position? Draw the profit and loss diagram for this strategy as a function of<br />
the stock price at expiration.<br />
13. The common stock of the P.U.T.T. Corporation has been trading in a narrow price range<br />
for the past month, and you are convinced it is going to break far out of that range in the<br />
next three months. You do not know whether it will go up or down, however. The current<br />
price of the stock is $100 per share, the price of a three-month call option with an<br />
exercise price of $100 is $10, and a put with the same expiration date and exercise price<br />
costs $7. (L O 15-2)<br />
a. What would be a simple options strategy to exploit your conviction about the stock<br />
price’s future movements?<br />
b. How far would the price have to move in either direction for you to make a profit on<br />
your initial investment?<br />
24. A put option with strike price $60 trading on the Acme options exchange sells for $2. To<br />
your amazement, a put on the firm with the same expiration selling on the Apex options<br />
exchange but with strike price $62 also sells for $2. If you plan to hold the options position<br />
until expiration, devise a zero-net-investment arbitrage strategy to exploit the pricing<br />
anomaly. Draw the profit diagram at expiration for your position.<br />
4. Suresh Singh, CFA, is analyzing a convertible bond. The characteristics of the bond and<br />
the underlying common stock are given in the following exhibit:<br />
Convertible Bond Characteristics<br />
Par value $1,000<br />
Annual coupon rate (annual pay) 6.5%<br />
Conversion ratio 22<br />
Market price 105% of par value<br />
Straight value 99% of par value<br />
Underlying Stock Characteristics<br />
Current market price $40 per share