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Options, Futures, and Other Derivatives

John C. Hull

Chapter 10

Trading Strategies Involving Options - all with Video Answers

Educators

Chapter Questions

01:26

Problem 1

What is meant by a protective put? What position in call options is equivalent to a protective put?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
02:32

Problem 2

Explain two ways in which a bear spread can be created.

Carlene Jimenez
Carlene Jimenez
Numerade Educator
02:14

Problem 3

When is it appropriate for an investor to purchase a butterfly spread?

James Kiss
James Kiss
Numerade Educator
01:26

Problem 4

Call options on a stock are available with strike prices of $\$ 15, \$ 17 \frac{1}{2},$ and $\$ 20,$ and expiration dates in 3 months. Their prices are $\$ 4, \$ 2,$ and $\ S \frac{1}{2},$ respectively. Explain how the options can be used to create a butterfly spread. Construct a table showing how profit varies with stock price for the butterfly spread.

Jodi Folley
Jodi Folley
Numerade Educator
01:36

Problem 5

What trading strategy creates a reverse calendar spread?

Adam Conner
Adam Conner
Numerade Educator
03:18

Problem 6

What is the difference between a strangle and a straddle?

Sanu Kumar
Sanu Kumar
Numerade Educator
01:58

Problem 7

A call option with a strike price of $\$ 50$ costs $\$ 2 .$ A put option with a strike price of $\$ 45$ costs $\$ 3 .$ Explain how a strangle can be created from these two options. What is the pattern of profits from the strangle?

Daniel Cisneros
Daniel Cisneros
Numerade Educator
06:54

Problem 8

Use put-call parity to relate the initial investment for a bull spread created using calls to the initial investment for a bull spread created using puts.

Virginia Rauch
Virginia Rauch
Numerade Educator
02:44

Problem 9

Explain how an aggressive bear spread can be created using put options.

Caitlyn Hobbins
Caitlyn Hobbins
Numerade Educator
02:40

Problem 10

Suppose that put options on a stock with strike prices $\$ 30$ and $\$ 35$ cost $\$ 4$ and $\$ 7$, respectively. How can the options be used to create (a) a bull spread and (b) a bear spread? Construct a table that shows the profit and payoff for both spreads.

Kari Hasz
Kari Hasz
Numerade Educator
01:03

Problem 11

Use put-call parity to show that the cost of a butterfly spread created from European puts is identical to the cost of a butterfly spread created from European calls.

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
03:20

Problem 12

A call with a strike price of $\$ 60$ costs $\$ 6 .$ A put with the same strike price and expiration date costs $\$ 4 .$ Construct a table that shows the profit from a straddle, For what range of stock prices would the straddle lead to a loss?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
00:26

Problem 13

Construct a table showing the payoff from a bull spread when puts with strike prices $K_{1}$ and $K_{2},$ with $K_{2}>K_{1},$ are used.

Zach Steedman
Zach Steedman
Numerade Educator
00:18

Problem 14

An investor believes that there will be a big jump in a stock price, but is uncertain as to the direction. Identify six different strategies the investor cain follow and explain the differences among them.

Nick Johnson
Nick Johnson
Numerade Educator
10:33

Problem 15

How can a forward contract on a stock with a particular delivery price and delivery date be created from options?

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
03:25

Problem 16

"A box spread comprises four options. Two can be combined to create a long forward position and two can be combined to create a short forward position." Explain this statement.

Matthias Wuest
Matthias Wuest
Numerade Educator
03:34

Problem 17

What is the result if the strike price of the put is higher than the strike price of the call in a strangle?

Jonathan Tapiwa
Jonathan Tapiwa
Numerade Educator
03:14

Problem 18

One Australian dollar is currently worth $\$ 0.64$. A I-year butterfly spread is set up using European call options with strike prices of $\$ 0.60, \$ 0.65,$ and $\$ 0.70 .$ The risk-free interest rates in the United States and Australia are $5 \%$ and $4 \%$ respectively, and the volatility of the exchange rate is $15 \%$. Use the DerivaGem software to calculate the cost of setting up the butterfly spread position. Show that the cost is the same if European put options are used instead of European call options.

Alejandro Ruiz
Alejandro Ruiz
Numerade Educator
05:59

Problem 19

Three put options on a stock have the same expiration date and strike prices of $\$ 55, \$ 60$ and $\$ 65 .$ The market prices are $\$ 3, \$ 5,$ and $\$ 8,$ respectively. Explain how a butterfly spread can be created. Construct a table showing the profit from the strategy. For what range of stock prices would the butterfly spread lead to a loss?

Karan Sood
Karan Sood
Numerade Educator
09:44

Problem 20

A diagonal spread is created by buying a call with strike price $K_{2}$ and exercise date $T_{2}$ and selling a call with strike price $K_{1}$ and exercise date $T_{1},$ where $T_{2}>T_{1} .$ Draw a diagram showing the profit when
(a) $K_{2}>K_{1}$ and
(b) $K_{2}<K_{1}$

Sergio Chaves
Sergio Chaves
Numerade Educator
01:26

Problem 21

Draw a diagram showing the variation of an investor's profit and loss with the terminal stock price for a portfolio consisting of:
(a) One share and a short position in one call option
(b) Two shares and a short position in one call option
(c) One share and a short position in two call options
(d) One share and a short position in four call options In each case, assume that the call option has an exercise price equal to the current stock price.

Jodi Folley
Jodi Folley
Numerade Educator
10:33

Problem 22

Suppose that the price of a non-dividend-paying stock is $\$ 32,$ its volatility is $30 \%,$ and the risk-free rate for all maturities is $5 \%$ per annum. Use DerivaGem to calculate the cost of setting up the following positions:
(a) A bull spread using European call options with strike prices of $\$ 25$ and $\$ 30$ and a maturity of 6 months
(b) A bear spread using European put options with strike prices of $\$ 25$ and $\$ 30$ and a maturity of 6 months
(c) A butterfly spread using European call options with strike prices of $\$ 25, \$ 30,$ and $\$ 35$ and a maturity of 1 year
(d) A butterfly spread using European put options with strike prices of $\$ 25, \$ 30,$ and $\$ 35$ and a maturity of 1 year
(e) A straddle using options with a strike price of $\$ 30$ and a 6 -month maturity
(f) A strangle using options with strike prices of $\$ 25$ and $\$ 35$ and a 6 -month maturity In each case provide a table showing the relationship between profit and final stock price. Ignore the impact of discounting.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator