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ACCOUNTING AND FINANCIAL ENGINEERING - EXAMPLE 34.5 : In an American style option for share market, 2 persons - A and B agree to the following : B is required to sell 100 shares of IBMS to A for $85 per share anytime that A wants in the next 8 months. A will pay B $2 per share up front, non-refundable for this option. IBMS involves in petrochemical processing. IBMS stock is currently selling for $80 per share. (a) If A did not buy the share of IBMS from B after 8 months, how much will B earn? (b) If the share of IBMS goes up to $100 / share in 6 months later : (i) how much should A pay B for 100 shares according to their optional agreement? (ii) how much will A earn from 100 shares purchased from B when all the 100 shares are sold to the open market? (iii) how much net profit will A earn for selling 100 shares to the open market?
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Answer Posted / kangchuentat
ACCOUNTING AND FINANCIAL ENGINEERING - ANSWER 34.5 : (a) Non-refundable payment = $2 / share x 100 shares = $200. (b) (i) Payment of A to B = $85 / share x 100 shares = $8500. (ii) Payment of open market to A = $100 / share x 100 shares = $10000. (iii) Net profit = answer b (ii) - answer b (i) - answer a = $10000 - $8500 - $200 = $1300. The answer is given by Kang Chuen Tat; PO Box 6263, Dandenong, Victoria VIC 3175, Australia; SMS +61405421706; chuentat@hotmail.com; http://kangchuentat.wordpress.com.
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