Economics Homework Help

Help me study for my Finance class. I’m stuck and don’t understand.

Short Answer Assignment 3 

1. What position in naked options would a firm adopt if they believe that the price of the stock is going to drop and the volatility of the stock is going to decrease?

2. Microsoft is currently trading at $26. A firm expect that prices will increase but not rise above $28 per share. Options on Microsoft with strikes of $22.50, $25.00, $27.50, and $30 are available. What options portfolio would they construct from these options to incorporate their views?

3. Assume the current volatility of oil is high. What options portfolio offers a firm a gain from the high volatility if they do not have a view on direction?

4. A firm is planning to trade on the fortunes of a biotech firm that has a drug patent pending FDA approval. If the patent is approved, the stock price is expected to go up sharply. If it is not approved, the stock will drop sharply. In the firm’s view, it is unlikely to move more than 20% in either direction. Describe a portfolio combining straddles and strangles that takes advantage of that view. Suppose (for example) that the stock price of the firm is currently at 100.

5.    A. A firm is long futures and long a straddle, what is their view on direction? On volatility?

B. (8.26) If a firm is short futures and long a straddle, what is their view on direction? On volatility

6.  How does the payment of an unexpected dividend affect (a) call prices and (b) put prices?