E connect Yousef Sherhan FIN4710 Advanced Investment Analysi

E connect Yousef Sherhan FIN4710 Advanced Investment Analysis Summer 2018 FINANCE Homework #4 instructions help Question 2 (of 5) | Save & Exit | | Submit value 10.00 points You purchase one Facebook October 170 put contract for a premium of $9.25. What is your maximum possible profit? Assume each contract is for 100 units. Potential profit References eBook & Resources Worksheet Learning Objective: 15-01 Calculate the profit to various option positions as a function of ultimate security prices.

Solution

Q2)

The maximum profit could only be achieved if the stock price becomes 0. In such case since it is a put contract, the whole contract price excluding the premium amount would be the per-unit profit; then it is to be multiplied by the number of units to get the total amount of profit.

Required profit = Per unit profit × Number of units

                        = (170 – 9.25) × 100

                        = $160.75 × 100

                        = $16,075 (Answer)

Q5)

Here the purchase price is $51. Now there are two selling price – one is $48 and the other is $56. If it is sold on $56 there would be a profit, since the selling price is higher than purchase price; if it is sold on $48 there would be a loss, since the selling price is lower than purchase price.

Maxi profit = 56 – 51

                   = $5 (Answer)

Mini profit = 48 – 51

                   = $3 (Answer)