An investor purchases a stock for $38 and a put for $.50 with a strike price of $35. The
investor sells a call for $.50 with a strike price of $40. What is the maximum profit and
loss for this position? Draw the profit and loss diagram for this strategy as a function of
the stock price at expiration.
13. The common stock of the P.U.T.T. Corporation has been trading in a narrow price range
for the past month, and you are convinced it is going to break far out of that range in the
next three months. You do not know whether it will go up or down, however. The current
price of the stock is $100 per share, the price of a three-month call option with an
exercise price of $100 is $10, and a put with the same expiration date and exercise price
costs $7. (L O 15-2)
a. What would be a simple options strategy to exploit your conviction about the stock
price’s future movements?
b. How far would the price have to move in either direction for you to make a profit on
your initial investment?
24. A put option with strike price $60 trading on the Acme options exchange sells for $2. To
your amazement, a put on the firm with the same expiration selling on the Apex options
exchange but with strike price $62 also sells for $2. If you plan to hold the options position
until expiration, devise a zero-net-investment arbitrage strategy to exploit the pricing
anomaly. Draw the profit diagram at expiration for your position.
4. Suresh Singh, CFA, is analyzing a convertible bond. The characteristics of the bond and
the underlying common stock are given in the following exhibit:
Convertible Bond Characteristics
Par value $1,000
Annual coupon rate (annual pay) 6.5%
Conversion ratio 22
Market price 105% of par value
Straight value 99% of par value
Underlying Stock Characteristics
Current market price $40 per share
Annual cash dividend $1.20 per share
Compute the bond’s: (LO 15-3)
a. Conversion value.
b. Market conversion price.
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