## Grand Canyon FIN451 week 6 Problem SET Solution

**Grand Canyon FIN451 week 6 Problem SET Solution**

- Chapter 15: problem sets, numbers 10, 13, and 24, and CFA problems, number 4
- Chapter 16: problem sets, numbers 10, 11, 12, and 28

APA format is not required, but solid academic writing is expected.

Answers should be submitted using an Excel spreadsheet in order to show all calculations, where applicable.

You are not required to submit this assignment to Turnitin.

Answers should be submitted using an Excel spreadsheet in order to show all calculations, where applicable.

**CHAPTER 15**

10. 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.

**CHAPTER 16**

10. Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio

is perfectly hedged against: (LO 16-5)

a. Small price changes in the underlying asset.

b. Small price decreases in the underlying asset.

c. All price changes in the underlying asset.

11. After discussing the concept of a delta-neutral portfolio, Washington determines that he

needs to further explain the concept of delta. Washington draws the value of an option

as a function of the underlying stock price. Draw such a diagram, and indicate how delta

is interpreted. Delta is the: (LO 16-5)

a. Slope in the option price diagram.

b. Curvature of the option price graph.

c. Level in the option price diagram.

12. Washington considers a put option that has a delta of 2 .65. If the price of the underlying

asset decreases by $6, then what is the best estimate of the change in option

price?

28. According to the Black-Scholes formula, what will be the value of the hedge ratio of a

put option for a very small exercise price?