6th May, Mock Test 1

Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

6th May, Mock Test 1

Dear Content pristine, Pls explain

Qn 77. An investor predicts that stock price of Zibag AG will remain in the range of 40 to 50. he wants to bet on this prediction using options. the following option quotes are available for Zibag AG in the market.
1. call option with a strike price of 42 and a premium of 6.6
2. Call option with a strike price of 48 and a premium of 2
3. Call option with a strike price of 45 and a premium of 5.5
4. Put option with a strike price of 54 and a premium of 2.2
5. Put option with a strike price of 40 and a premium of 1.6
Which of the following strategies would be the most suitable for his bet and what would be his profit if the stock price is at 50

a. Bear Call spread and profit would be 3.
b. Bear Put spread and profit would be 3.4
c. Butterfly Call spread and profit would be 2.5
d. Butterfly Call spread and profit would be 7.5

According to pristine, Butterfly spread would be appropriate for investor as he is expecting stock price will stay near the strike price of written calls. Profit will be 7.5

M not agreed with pristine solution. As investor already predicted that stock price will remain between 40 to 50. And his screen is showing put option of 54 at 2.2, then definitely he is going to long this. And when he predicting that stock wont go below 40 and his screen showing put of 40 at 1.6 then definitely he is going to short it. i.e, "Bear Put Strategy" and profit from this will be 3.4

So Ans should be "B" not "D" as given by pristine. Pls help

Tags:

bks.gtb
Good Student
Posts: 13
Joined: Sat Apr 07, 2012 7:43 pm

Re: 6th May, Mock Test 1

Hi,

How did we arrive at profit of 7.5 for Butterfly spread.I think for the call options given, the strategy will be

Buy 42 call @ 6.6 => net profit of 1.4
Buy 48 call @ 2=> nil profit
Sell 2 45 calls @ 11 => net profit of 1
Total profit is 2.4

Not sure how we arrived at profit of 7.5...

Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: 6th May, Mock Test 1

Dear Bks,

Even M asking why teh ans should be c or d... because in this qn butterfly spread is not at all beneficial compared to bear put spread strategy. As we are getting teh profit of 3.4 in that.

Dear Content Pristine,

M expecting fast revert from your side as only 7 days left in the exam. Our queries/doubts should be resolved asap.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: 6th May, Mock Test 1

Hi Suresh,

I thought we have discussed this question. Anyways, The answer is
b. Bear Put spread and profit would be 3.4

All the best