HW No. 1. Due TUE JAN 26 page 1 of 2

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HW No. 1. Due TUE JAN 26 page 1 of 2

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HW No. 1. Due TUE JAN 26 page 1 of 2

The table below describes options prices for a stock MMM on AUG 25 2009. The strike prices, denoted by K, are in the leftmost column and there are four expiration months: Sep09, Oct09, Jan10 and Apr10. The stock price on August 25 was S = 27.50/share. Note, in the table, ---, means that the option does not exists or was not traded that day. Thus, for example, the premium of the call with strike price K = 30 and expiration in APR 10 was 2.40/share.

Study CH 8 in the text and CHs I, II and III in the OCC publication.

1. Use a calendar and Indicate the official expiration dates [the SAT immediately following the Third FR of the expiration month] of the options in the table.

2. Read CH III in the OCC publication. Suppose that MMM had a three-for-one split [See Stock split in the text’s index] right now – that is, when the prices in the table are the market prices. Explain in details (and show the new numbers) the price changes, and the rest of the adjustments.

3. On August 25 you bought the OCT, K = 25, call and at the same time you bought the OCT, 25 put. Suppose that you hold both option to their expiration. At the expiration of the options:

i. which option will you exercise? Why?

Your profit is defined to be: The per share cash flow at expiration MINUS the initial cost per share.

ii. Calculate your profit or loss if MMM’s price at expiration were:

a.S = 35; or, b.S = 20; or, c.S = 25.

Page 2 of 2

• Notice: For your convenience, I retyped the prices table below.
• 4. On August 25 you sold the OCT, 25, call and at the same time you sold the OCT, 25 put. Suppose that both options were not exercised till their expiration. [Remember that as a seller of the options you must oblige in case the holder exercise the option on you. Otherwise, you keep the premium]
• Calculate your profit/loss at expiration if MMML’s price at expiration were:
• a. S = 35; or, b. S = 20; or, c. S = 25.
• Your profit is: per share cash flow at expiration – initial per share cost.
• 5. On august 25 you bought the APR 30 call and simultaneously sold the APR 32.5 call. The options were not exercised till their expiration.
• Calculate your profit/loss at expiration if MMML’s price at expiration were \$36.50/share.
• 6. On august 25 you bought the APR 30 put and simultaneously sold the APR 32.5 put. The
• options were not exercised till their expiration.
• Calculate your profit/loss at expiration if MMM’s price at expiration were \$36.50/share.