I need step by step explanation on how the answer in bold were gotten.* The foll
ID: 2635277 • Letter: I
Question
I need step by step explanation on how the answer in bold were gotten.* The following prices are available for call and put options on a stock priced at $50. The risk-free raw is 6 percent and the volatility is 0.35. The March options have 90 days remaining and the June options have 180 days remaining. The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20. Assume that each transaction consists of one contract (for 100 shares ) unless otherwise indicated. Answer questions 10 and 11 about a calendar spread based on the assumption that stock prices are expected to remain fairly constant Use the June/March 50 call spread. Assume one contract of each. 10. What will the spread cost? a. -$176 b. $ l76 c. $558 d. $105 e. none of the above 11. What will be the profit if the spread is held 90 days and the stock price is 545? a. $36 b. $20 e. $558 d -$20 e. none of the aboveExplanation / Answer
Calendar spread = Buying call option (Strike 50) Maturing in June and selling call option (Strike50) maturing in March; such as to square both position in march
10. Cost = (5.58-3.82)*100 = 176
20. Profit from option expiring in March= -Max(45-50,0) =-5
Price of the option expiring 90 days from now and strike 50, spot 45. Using black Scholes calculator
Price =3.995
Profit from option expiring in June =(5.58-1.585)= 3.995
Net Profit = (3.995-5)*100 =-100.5