50.1K

Verified Solution

Link Copied!

You are a fund manager in Derivatives Asset Management Fund (2322.HKU). You manage a portfolio consists of stocks and derivatives contracts. You profit mainly from arbitrage activities from mispricing and speculating on the movements and volatility of the market. On a regular day, you will project your price expectation on the market. The current Hang Seng Index level is 28500. The 6-month risk-free interest rate is 0.1% p.a., continuously compounded. The dividend yield of HSI is expected to be 3.5% p.a., continuously compounded for the coming 6 months. Below is your expectation of HSI level 6 months later:

Probability	HSI Level
0.1	27000
0.3	28500
0.4	29000
0.2	30000

In order to speculate in the market, you are considering the following strategies:

Strategy 1: Long Call option with a strike price of 28500, short put option with a strike price of 27000 Strategy 2: Long Call option with a strike price of 27000, short call option with a strike price of 30000 Strategy 3: Long Call and Long Put with a strike price of 28500

All of the options used are with 6-month maturity. Below is the relevant call and put premiums:

(Leave 2 d.p. for dollar terms answer)

Strike	Call premium	Put premium
27000	2112.39	1093.31
28500	1363.65	1843.82
30000	831.38	2810.8

What is the expected profit of strategy 1,2 and 3?

Answer & Explanation Solved by verified expert

See Answer