The University of Manchester Profit Diagram Paper

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Question 6:
You are given:
Mary short-sells a stock that has a current price of 44 per share.
Mary also shorts a 40-strike European put option and buys a 50-strike European call option.
Both options expire in one year.
The prices of the options on this stock are:
Strike Price
40
50
Call option
8.42
3.86
Put option
2.47
7.42
The annual interest rate is 5%.
Calculate the maximum profit and maximum loss for the overall position at expiration and show the
profit diagram
Solution:
Question 7:
Stephanie is trying to decide which strategy would perform better. The strategies are:
1. Short a 1-year call option with a strike price of 15 and
Short a 1-year put option with a strike price of 15
2. Short a 1-year call option with a strike price of 15,
Short a 1-year put option with a strike price of 15,
Long a 1-year call option with a strike price of 20 and
Long a 1-year put option with a strike price of 10
a
The prices of the options on this stock are:
Strike Price
Call option
Put option
10
3
2
15
2
4
20
5
The annual interest rate is 5%.
Draw the profit diagram for both strategies. Which strategy would perform better and by how much
if the stock price one year from now is 25. Name the 2 strategies.
Solution:

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