RE: 5B, Fall 94, #28

Siegman, Barry D. ( (no email) )
Mon, 19 Apr 1999 14:37:34 -0400

Another way to do it, rather than plugging in points, is to go back to the
definitions of each option. The whole picture is h(x)=f(x)+g(x). An put or
call is worth either nothing or the difference between the underlying's
price and the strike price (positive or negative, depending if you bought or
sold it). A loan is worth the FV of the loan (again, either positive or
negative, depending if you borrowed or lent). The whole picture is just a
picture of an option or two shifted up or down by a loan. Break it down
into its logical components and consider what each component means.

Hope this alternate (hopefully more conceptual) approach helps some.

BDS

> ----------
> From: Goldfarb, Richard[SMTP:Goldfarb@WESTPORT.MSMAIL.AIGFPC.COM]
> Sent: Monday, April 19, 1999 2:26 PM
> To: studygroup5b@lists.casact.org
> Subject: RE: 5B, Fall 94, #28
>
> While I await the full question from you, here's what I think will clear
> things up for you.
>
> In all questions like this, there is rarely any subtle meaning behind it
> all. Simply plot a few points and connect the dots. Take Figure E for
> example. If the stock price is zero, then you have to repay the 100
> that you borrowed, that's -100. The 2 shares of stock are worth zero
> and the call option you sold is zero, so the total is -100. If the
> stock price is 100, then the borrowing is again -100, the two shares are
> 200 and the option payoff is zero, for a total of 100. Then if stock is
> 101, then borrowing is -100, stock is 202 and the option is -1, so
> that's 101. Connect the three dots and you are done.
>
> The only thing to be careful about in these cases is to plot points at,
> above and below the exercise prices of the options. That's where all
> the action will be. So if there are several options involved in a
> particular strategy, be sure to plot points at each exercise price and
> at points in between.
>
> The search for additional meaning is pointless. After a bit of practice
> though, you should be able to start to see some patterns.
>
> > -----Original Message-----
> > From: Shenaz_Keshwani@mercer.com [SMTP:Shenaz_Keshwani@mercer.com]
> > Sent: Monday, April 19, 1999 2:58 PM
> > To: studygroup5b@lists.casact.org; Richard Goldfarb
> > Subject: 5B, Fall 94, #28
> >
> >
> > Chapter 20/21
> >
> > What do figures B and E represent. I have tried to draw the figures
> > in the
> > attached file.
> >
> > Thanks
> >
> >
> > Shenaz << File: MS Excel spreadsheet >>
>