DSC4825 Assignment 2 2025 (660749)

DSC4825
ASSIGNMENT 2 2025

UNIQUE NO. 660749
DUE DATE: 1 JULY 2025

,Financial Modelling 1

Question 1

We are told:

 The current stock price is R50
 Call option (2-month, at-the-money) is priced at R4.05
 Thabo: Long 1 share and short 2 call options
 Mashudu: Long 1 share and short 4 call options

1.1: Draw profit/loss diagrams

Let’s define “S” as the stock price at expiration.

Thabo's Strategy:

 Long 1 share → Gain = S - 50
 Short 2 calls → Loss = -2 * max(S - 50, 0)
 Premium received = 2 * R4.05 = R8.10

Total Profit = (S - 50) - 2 * max(S - 50, 0) + 8.10

Mashudu's Strategy:

 Long 1 share → Gain = S - 50
 Short 4 calls → Loss = -4 * max(S - 50, 0)
 Premium received = 4 * R4.05 = R16.20

Total Profit = (S - 50) - 4 * max(S - 50, 0) + 16.20

You would now draw two lines for both strategies across a range of S (say from R40 to
R70). The graphs show profits peaking at S = 50 and dropping as S increases beyond
50.

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