Name(s)_____________________________________________________________________________

Homework #3 – 80 Points Total

*Due at the beginning of class on Wednesday, October 31st.
**You may work in groups of up to 4 people; just put all of the names at the top of this page.
Your group should only hand in one homework.
**Please print this HW one-sided and write in the space provided (I will try to leave plenty of
space, but use the back of the page if you need to). Please show all work for full credit!

Question 1 (25 points)

You are looking at options on Dumbledore Corporation with 14 months until expiration and a strike price
of $85. The risk free rate for 14 months is 4.5% (annualized with continuous compounding). The firm is
not expected to pay any dividends over the next 14 months, and the current stock price is $92.78. The
price of the call option is $13.06 and the put option is $2.11. Find the arbitrage trade given these prices
and show the profit for each contract.

Homework #3
MGMT 41150 – Futures and Options
Professor Boquist
(Blank page – extra space for question 1 answer)

Homework #3
MGMT 41150 – Futures and Options
Professor Boquist
Question 2 (25 points)
You are looking at options on Ravenclaw Corporation with 13 months until expiration and a strike price
of $50. The risk free rate for maturities between 1 and 13 months is 2.5% (annualized with continuous
compounding). The firm is expected to pay a dividend of $1.20 each quarter over the next 13 months (i.e.
a $1.20 dividend in 3, 6, 9 and 12 months), and the current stock price is $48.11. The price of the call
option is $3.14 and the put option is $4.79. Find the arbitrage trade given these prices and show the profit
for each contract.

Homework #3
MGMT 41150 – Futures and Options
Professor Boquist
(Blank page – extra space for question 2 answer)

Homework #3
MGMT 41150 – Futures and Options
Professor Boquist
Question 3 (30 points)
Use the data below to answer questions a) through d) for Malfoy Corporation, which is currently trading
for $31 per share:

Call Options Put Options

Strike Bid Price Ask Price Strike Bid Price Ask Price
$20 $12.15 $12.33 $20 $0.76 $0.89
$25 $7.26 $7.39 $25 $1.05 $1.18
$30 $2.55 $2.66 $30 $1.84 $1.97
$35 $1.46 $1.59 $35 $5.67 $5.81
$40 $0.88 $0.97 $40 $10.79 $10.95

a) Find the cost of a butterfly spread using the call options with strikes of 25, 30 and 35. Draw the
profit diagram and show the profit for the ending stock price in the appropriate ranges.

Homework #3
MGMT 41150 – Futures and Options
Professor Boquist
Homework #3
MGMT 41150 – Futures and Options
Professor Boquist
 b) Find the cost of a straddle using options with a strike price of 30. Draw the profit diagram and
show the profit for the ending stock price in the appropriate ranges.

Homework #3
MGMT 41150 – Futures and Options
Professor Boquist
 c) Find the cost of a strangle using the options with strikes of 20 and 40. Draw the profit diagram
and show the profit for the ending stock price in the appropriate ranges.

Homework #3
MGMT 41150 – Futures and Options
Professor Boquist
 d) Find the cost of an iron condor spread using options with a strike price of 20, 25, 30 and 35.
Draw the profit diagram and show the profit for the ending stock price in the appropriate ranges.

Homework #3
MGMT 41150 – Futures and Options
Professor Boquist