1. Graph the pay-off and Profit from writing a European put option with option price (premium) = $10, strike price = $50. Also calculate the intrinsic value of this option if the stock price in $45. [4] 2. Suppose you buy a 100 strike European put and sells a 120 strike European put on the same stock. Calculate the pay off. [4] 3. Suppose a spot price of a market index is $900. After 6 months the market index is priced at 920. The annual risk free rate is 5%. The premium on the long put, with exercise price of 930 is $10. Calculate the profit at expiration for a long put. [4] 4. European put and call options both have an exercise price of $50 that expires in 120 days. The underlying asset is priced at $52 and makes no cash payments during the life of the option. The risk-free rate is 4.5% and the put is selling for $3.80. Use the put-call parity, to calculate the price of the call option. [4] 5. It is sometimes argued that speculation in futures markets is pure gambling. It is not in the public interest to allow speculators to trade on a futures exchange. Discuss this viewpoint in not more than lines. [4]
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