Suppose an investor buys a call option on 45,000 barrels of oil with an exercise price of $51 per barrel and simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $51 per barrel. Her net payoff per barrel on these option contracts is _ if the market price per barrel is $49 and _ if the price per barrel is $55.

Question

21-04-2020
Business

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Suppose an investor buys a call option on 45,000 barrels of oil with an exercise price of $51 per barrel and simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $51 per barrel. Her net payoff per barrel on these option contracts is _ if the market price per barrel is $49 and _ if the price per barrel is $55.

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aquialaska aquialaska · Answer 1 · 2020-04-25T05:33:13+02:00

Answer:

The correct answer is $2 and $4.

Explanation:

According to the scenario, the computation for the given data are as follows:

If market price = $49 per barrel

Here, call option can not be used as exercise price is more than the market price.

So, payoff per barrel on put option = $51 - $49

= $2

If market price = $55

Here, Put option can not be used as exercise price is less than the market price.

So, payoff per barrel on Call option = $55 - $51

= $4

Tundexi Tundexi · Answer 2 · 2022-01-04T11:04:13+01:00

The payoff per barrel on these option contracts is $2 if the market price per barrel is $49 and $4 if the price per barrel is $55.

Since the market price equals $49 per barrel, hence, the option can not be used as exercise price because it is more than the market price.

Payoff per barrel on put option = $51 - $49

Payoff per barrel on put option = $2

However, if the market price equal $55, the Put option can not be used as exercise price because it is less than the market price.

Payoff per barrel on put option = $55 - $51

Payoff per barrel on put option = $4

In conclusion, the payoff per barrel on these option contracts is $2 if the market price per barrel is $49 and $4 if the price per barrel is $55.