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Solve part (c) and (d) of this problem below: XYZ plc has been offered the following...

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Finance

Solve part (c) and (d) of this problem below: XYZ plc has beenoffered the following quotes for options on the dollar given acurrent market price of 60 pence:

Strike price of dollar in pence Call premium Put premium

                                          1 year          1 year

62                                       6.9              3.0

64                                       5.9              3.8

66                                       4.8              4.5

67                                       4.5              5.1
a. Calculate the net payout from a purchased call option at astrike price of 67 pence for the following possible maturity prices55p, 60p,65p,70p,75p.
b. Calculate the net payout for a written put option at 66p for thefollowing possible maturity prices: 55p, 60p, 65p, 70p, 75p.
c. Calculate the total cost of the dollar if the MNC were toimplement part a and part b of this question for the followingmaturity prices: 55p, 60p, 65p, 70p, 75p.
d. Outline the advantages and disadvantages of purchasing a call at67p and writing a put at 66p for a MNC importing from the US.

Answer & Explanation Solved by verified expert
3.6 Ratings (616 Votes)

Answer c) The pay off from long call = Max( S-K-P ,-P)

The pay off from writing Put = Max( S-K+P ,P)

Spot Price Strike Call premium Pur premium Long Call payoff ( C ) Writing Put payoff(L) Net Pay off (l+C)
55 62 6.9 3 MAX((A2-B2-C2),-C2) -6.9 6.9 MAX((A2-B2+C2),C2) 0
55 64 5.9 3.8 -5.9 5.9 0
55 66 4.8 4.5 -4.8 4.8 0
55 67 4.5 5.1 -4.5 4.5 0
60 62 6.9 3 -6.9 6.9 0
60 64 5.9 3.8 -5.9 5.9 0
60 66 4.8 4.5 -4.8 4.8 0
60 67 4.5 5.1 -4.5 4.5 0
65 62 6.9 3 -3.9 9.9 6
65 64 5.9 3.8 -4.9 6.9 2
65 66 4.8 4.5 -4.8 4.8 0
65 67 4.5 5.1 -4.5 4.5 0
70 62 6.9 3 1.1 14.9 16
70 64 5.9 3.8 0.1 11.9 12
70 66 4.8 4.5 -0.8 8.8 8
70 67 4.5 5.1 -1.5 7.5 6
75 62 6.9 3 6.1 19.9 26
75 64 5.9 3.8 5.1 16.9 22
75 66 4.8 4.5 4.2 13.8 18
75 67 4.5 5.1 3.5 12.5 16

Answer d) Purchasing a call at 66P and writing a Put on 67 will have pay off as below,

Spot Price Strike Call premium Pur premium Long Call payoff ( C ) Writing Put payoff(L) Net Pay off (l+C)
55 66 4.8 4.5 -4.8 4.8 0
55 67 4.5 5.1 -4.5 4.5 0
60 66 4.8 4.5 -4.8 4.8 0
60 67 4.5 5.1 -4.5 4.5 0
65 66 4.8 4.5 -4.8 4.8 0
65 67 4.5 5.1 -4.5 4.5 0
70 66 4.8 4.5 -0.8 8.8 8
70 67 4.5 5.1 -1.5 7.5 6
75 66 4.8 4.5 4.2 13.8 18
75 67 4.5 5.1 3.5 12.5 16

Advantage : never in loss , no negative payoff from strategy

Disadvantage : Upside is also limited due to short difference in strike prices of two options

and
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