Question 1
Consider an asset which pays continuous dividend. Let S= $100 and r=10%.
Suppose the 6-month futures contract of this asset is trading at $102.02.
a) Calculate the "implied" dividend yield ( q ). [i.e. the value of q that the traders expect in the next 6 months.]
b) Suppose you believe that the correct q should be 2%, what should you do in order to make money?
c) If 3 months later, S = $80 and the "implied" q= 2%, based on what you do in b), how much money will you make?
d) If 3 months later, S =$120 and the "implied" q= 2%, based on what you do in b), how much money will you make?
Question 2
Let r= 10% S= $100
6 month 110 call =$9.44, 6 month 100 Put =$4.66
Find the price range such that you make money under each of the following cases.
a) long 1 share
b) long 1 6-month 110 call (each option is on 1 share)
c) write 1 6-month 110 call (each option is on 1 share)
d) long 1 6-month 100 put (each option is on 1 share)
e) write 1 6-month 100 put (each option is on 1 share)
f) long 1 share + write 1 6-month 110 Call (each option is on 1 share)