Apr 2005 - Q2 - UK

[Oxymoron]

The question asks for the profit and loss diagram - not the payoff diagram.

Since we purchase a call option with longer maturity than we sell, shouldn't the P&L for extreme movements be a negative constant (the different between the premiums)?

Also, since it's at the money, shouldn't the value for "P&L now" be 0 at 4500 (just the reverse of the position taken) - and decrease as it moves slightly in the money (as delta of the portfolio is negative, since longer dated maturities have smaller deltas) before eventually converging back to the net premium outflow value?

Thanks.

 

[Edwin]

I had to this today and also need help. The P/L diagram looks wrong. I actually got the exact negative of what the examiners drew. Would like to hear views.

I drew the normal P/L diagram for a call struck at 4500 and drew the P/L diagram for a short call struck at 4500, with the P/L diagram of the short call being 'concave-shaped' and symetric about zero, but not including the half on the left side of zero.

Adding this graphs;- a decreasing 'curve' for the short call plus a straight negative line will give a decreasing negative curve. It is impossible to get what the examiner's got but I may be wildly wrong.

I get the exact negative of the examiner's solution for the P/L graph. I wish ASET went as far as 2005. Any views?

 

[Edwin]

I had to this today and also need help. The P/L diagram looks wrong. I actually got the exact negative of what the examiners drew. Would like to hear views.

I drew the normal P/L diagram for a call struck at 4500 and drew the P/L diagram for a short call struck at 4500, with the P/L diagram of the short call being 'concave-shaped' and symetric about zero, but not including the half on the left side of zero.

Adding this graphs;- a decreasing 'curve' for the short call plus a straight negative line will give a decreasing negative curve. It is impossible to get what the examiner's got but I may be wildly wrong.

I get the exact negative of the examiner's solution for the P/L graph. I wish ASET went as far as 2005. Any views?

Edwin, this is a normal Calendar spread drawn with the assumption that the overall P/L diagram is drawn at the maturity if the short dated Option, the examiner's are clearly correct except that they drew a payoff diagram like Oxymoron says.