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QUESTION 1

You own 5 lots of ABB Bhd. Stock currently trading at RM 8.00. You think ABB stock is likely to rally over the next few weeks, yet you cannot risk losing too much. You want to participate in a potential rally without exposing yourself to too much risk. 1 lot =100 share

The following quotes are available.

30-day ABB 8.00 call @ 0.35

30-day ABB 8.00 put @ 0.25

(i) State the name of your strategy. [3 marks]

(ii) Outline the above strategy. [4 marks]

(iii) Graph the strategy (plot the position, label all axes, max, min points specify the option and state long or short position). [10 marks]

(iv) Outline the risk profile. [2 marks]

(v) State the maximum profit, maximum loss and breakeven point(s) in RM value. [6 marks]

(Total marks=25)

QUESTION 2

You notice the following prices quotes:

ABC Berhad stock price= RM7.30

8.00 call on ABC Berhad Stock = RM 0.50

8.00 put on ABC Berhad Stock = RM 0.90

i) Assuming the options have 15 days left to maturity, determine the intrinsic and time values of each option. (6 marks)

ii) Why is the put priced much higher than the call? (4 marks)

iii) As a result of the recent economic turmoil, ABC Berhad is faced with serious problems, and its stock price is expected to decline. What is the likely effect on the value of call and put? (4 marks)

iv) If the volatility of the ABC Berhad is expected to be increased in 3 months, what is likely to happen to the price of call and put? Discuss based on the demand and supply of options (6 marks)

(Total marks=20)

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