solve these questions and provide me a good and easy explanation of your work because i need to understand them for my final.
1/ â€œOMARâ€ Case: (5 marks)
For risk management purposes, â€œOMARâ€ decided toundertake a strategy consisting of owning the stock andshorting a call on each stock. He entered this position for 500 contracts that would expire in 6 months from now. He initially bought each stock for 55.05 $ and sold each call for 8.05$ with a strike price of 48.05$
a/ What is the amount of his initial investment?
b/ What is his gain/loss if the stock price in 6 months is 37$ ?
c/ What is the maximum amount he might lose when undertaking this strategy?
d/ What is his gain/loss if the stock price in 6 months decreased by 66120 basis
points?
e/ What is/are the breakeven price(s)?
2/ â€œXXXâ€ Case: (7.5 marks)
A US firm â€œXXXâ€ is specialized in international trade. Therefore it deals frequently with local and international banks. In 38 days from now a local bank â€œBBBâ€ is going to lend $10.2 millions to â€œXXXâ€ for 45 days to help it extend its international trade operations. The lending/borrowing rate in US is LIBOR plus 125 basis points. The risk managers in â€œBBBâ€ decided to use options to hedge their position especially that the LIBOR rate in US was very volatile during the last few months. Therefore they decided to use a put option with 45 days in underlying and a strike interest rate of 2.25%. We suppose that â€œBBBâ€ does not have money to buy the option right now. The current LIBOR in US is 2.55% and the put option costs the bank 17500$. The bank will pay back the loan she took for the option cost when lending â€œXXXâ€ the $10.2 millions.
a/ Compute the Effective annual rate on the loan made by â€œBBBâ€ if the LIBOR in 38 days from now is 2% ?
b/ Compute the Effective annual rate on the loan made by â€œBBBâ€ if the LIBOR in 38 days from now is 2.85% ?
3/ â€œYYYâ€ Case: (7.5 marks)
A US firm â€œYYYâ€ is specialized in international trade. Therefore it deals frequently with local and international banks. In 75 days from now â€œYYYâ€ is going to borrow $8.4 millions from a local bank â€œBBBâ€ for 180 days to extend its international trade operations. The borrowing rate in US is LIBOR plus 322 basis points. The risk managers in â€œYYYâ€ decided to use options to hedge their position especially that the LIBOR rate in US was very volatile during the last few months. Therefore they decided to use a call option with 180 days in underlying and a strike interest rate of 9%. We suppose that â€œYYYâ€ does not have money to buy the option right now. The current LIBOR in US is 8.25% and the call option costs â€œYYYâ€ 15500$. â€œYYYâ€ will pay back the loan she took for the option cost when borrowing the $8.4 millions from â€œBBBâ€.
a/ Compute the Effective annual rate on the loan taken by â€œYYYâ€ if the LIBOR in 75 days from now is 8.75%?
b/ Compute the Effective annual rate on the loan taken by â€œYYYâ€ if the LIBOR in 75 days from now is 9.25%?
1/ â€œFATIMAHâ€ Case: (5 marks)
For risk management purposes, â€œFATIMAHâ€ decided to undertake a strategy consisting of owning the stock and shorting a call on each stock. She entered this position for 7000 contracts that would expire in 2 months from now. She initially bought each stock for 55.2121 $ and sold each call for 8.2313$ with a strike price of 48.0045 $
a/ In your opinion, Why did she sell a call not a put on each stock? What did â€œFATIMAHâ€ expect as market price movement?
b/ What is the amount of her initial investment?
c/ What is her gain/loss if the stock price in 2 months is 37.145$ ?
d/ What is her gain/loss if the stock price in 2 months decreased by 66200 basis points? (Note: 100 basis points = 1% = 0.01$)
g/ What is/are the breakeven price(s)?
2/ â€œOUMAIMAâ€ Case: (5 marks)
For risk management purposes, â€œOumaimaâ€ decided to undertake a strategy consisting of selling a put with a strike price of 21.1098$ for 1.11$, selling a put with a strike price of 16.2451$ for 0.16$, and buy two puts with a strike price of 19.8931$ for a total of 1.2488$. She entered this position for 3500 contracts that would expire in 3 months from now.
a/ What is the amount of her initial investment?
b/ What is the amount of her max gain?
c/ What is her gain/loss if the stock price in 3 months is 17.145$ ?
d/ What is her gain/loss if the stock price in 3 months is higher than the medium strike price by 69 basis points? (Note: 100 basis points = 1% = 0.01$)
g/ What is/are the breakeven price(s)?
3/ â€œNOURâ€ Case: (5 marks)
â€œNOURâ€ is studying for her first midterm exam of â€œSpecial topics in Financeâ€ course. She prepared the following theoretical questions for you to help her reinforce her knowledge of risk management using options:
a/ â€œNOURâ€ is wondering what is the maximum loss an investor in a â€œcovered callâ€™ strategy could bear?
b/ â€œNOURâ€ was told by a friend of her working in an investment bank that â€œthe higher the strike price the lower the call value and the higher the strike price the lower the put valueâ€. Is that correct? If yes why? If No why?
c/ â€œNOURâ€ does not see any difference between the straddle and the reverse straddle strategies except their graphs which are opposite. Could you help her identify other conceptual differences between them from an investor point of view?
4/ â€œMANALâ€ Case: (5 marks)
â€œManalâ€ invested in a reverse butterfly spread using only puts. She received 0.3$ as initial investment for each contract. She made a loss of 1.3$ when the stock price in the market is 20.9$ and she can reach a maximum gain of 0.3$ out of this strategy. The highest put premium in this strategy is 3.05$ and the medium strike price is 20.5$. Finally, the lowest put premium was 9500 basis points below the medium put premium
a/ What was the highest strike price?
b/ What was the lowest put premium?
c/ What was the medium put premium?
d/ What was the lowest strike price?
e/ What is/are the breakeven price(s)
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