1. Finance 300 Financial Markets Lecture 28 © Professor J. Petry, Fall 2001 http://www.cba.uiuc.edu/broker/fin300/fin300pp.htm

2. 2 Logistics: Section A1: Thursday, 12/13/01, 8:00 - 11:00 am 223 Greg Hall Section N1: Thursday, 12/13/01, 8:00 - 11:00 am, 192 Lincoln Hall Conflicts: Friday, 12/14/01, 8:00 - 11:00 am, 138 Wohlers Hall Coverage: Chapter VIII, IX off-limits for any questions: TTD: VIII-12 (Portfolio Volatility) off-limits for problems (terminology okay): margin calcs (p. 334); B-S; P- C Parity Relationship. Format: Similar to last two exams. Multiple choice 30-40 questions mix between problems and terminology Office Hours: M (12/10) 1-3; T 3-4, W 1-2; Web ends Wed @ 2 Final Exam Preparation

3. 3 Options Terminology Chapter IX – Options

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6. 6 Things to Do: IX-3 John Q. Investor buys one April $40 IBM call option, writes two April $45 IBM call options, and buys one April $50 IBM call options. This strategy is called a butterfly spread. A. Using the options quotes on page IX-2 calculate the initial investment. B. Graph the payoff to this strategy. Remember to calculate the breakeven prices. Chapter IX – Options

7. 7 Things to Do: IX-4 Assume that you bought 1000 shares of Hypothetical Resources at $50 per share. Three month $50 put options are quoted at $1 per share. Show how buying put options now will hedge your position. (Hint: Show profit and loss if HR declines to $30, stays at $50, or increases to $70). Chapter IX – Options

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9. 9 Things to Do Graph the payout diagram for this transaction. Chapter IX – Options

10. 10 Things to Do: IX-5 Using the IBM quotes on page IX-2: A.Show the possible gains and losses with a $50 January buy straddle on IBM. (Hint: buy one Jan 50 call option and one January put option). B.Show the possible gains and losses with a $50 January write straddle on IBM. (Hint: write one Jan 50 call option and one January put option). Assume your broker requires a $2,000 margin. C. Graph the possible gains and losses against the stock price at the time of exercise. D.At what prices do you break even on this strategy? (Calculate the price of IBM at the point where profit is zero. There are two breakeven prices for each strategy). Chapter IX – Options

11. 11 Things to Do: IX-8 Susan Q. Speculator buys an April call option at 70. Using the Interest Options quote above (in class version) to answer the following questions. A.How much must Susan pay for the call option? B.Calculate the possible gains and losses if interest rates move to 6.0%, 6.5%, 7.0%, 7.5% and 8.0%. C. Graph the payout. Chapter IX – Options