Hi, I don't understand how the "Long stock profit/loss at expiry" column is calculated in the mark scheme for Apr22 Q7(i). It appears to have value "S_T - 100", but I don't know why. 1) The investor has 100 shares, so the total payoff for the 100 shares should be 100*(S_T - 100)? 2) We are assuming here that S_0 = 100, but this isn't necessarily the case? Is it ok to just assume this? 3) A more general question. If we have "an option", does this mean that we have an option on a single share/security? E.g. in this case, do the put/call options refer to an option on one share, or on 100 shares? Thanks!
We also found that the things you have noted above are all unclear from the question. Our ASET begins with a discussion of exactly this idea. You have to assume that, since the range of strikes centres around 100, that the price must be 100. This seems likely since the call and the put are similar value, which would only be the case if the options were at the money. You also calculate the profit from one share + one of each option, or for 100 shares + 100 of each option. Both would have scored full marks, but the examiner does one share and one of each option.
Hi, In part (ii) of the same question, the solution seems to give two contradictory answers. The first statement is: In order to make a profit the share price need to be between 93.55 and 106.45 And then the two following statements say that breakeven is 96.775. The first statement is not including the "Long stock profit / loss at expiry" and the later statements do. Why do they use two different seemingly contradictory approaches in the same answer?
