Three friends Tom, Jerry, and Kate are members of an investment club. They each have a
total of Ā£10,000 to invest in three companies A, B, and C. On 1st Nov 2016, the following
prices were available (Ā£)
Share
Call
Put
Strike price, K
A
55
0.91
2.48
58
B
110
2.17
4.33
115
C
13
0.89
0.09
12.5
They made the following investments (not considering any dividends and
commissions)
Tom bought 80 A shares, 200 B calls and saved the rest of the money in the bank
Jerry bought 50 B shares, 400 C puts and saved the rest of the money in the bank
Kate bought 50 A shares, 100 B calls and spent the rest on C shares.
The options expired after six months and the bank interest rate was 5% compounded continuously (assume
that fractional numbers of shares may be purchased). If, at the end of six months, A shares were worth Ā£59,
B shares Ā£108 and C shares Ā£12, find the value of each of the three friends portfolios and, hence the
returns they made on their original investment of Ā£10,000.
