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##### 1). Six-month call options with strike prices of $...

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Solution.-

**Question**

1). Six-month call options with strike prices of $45 and $50 cost $7 and $4, respectively.

1. What is the maximum gain when a bull spread is created from the calls?

2. What is the maximum loss when a bull spread is created from the calls?

3. What is the maximum gain when a bear spread is created from the calls?

4. What is the maximum loss when a bear spread is created from the calls?

2). Calculate the price of a three-month European put option on a stock with a strike price of $60 when the current stock price is $60, a dividend of $1.50 is expected in two months, the risk-free interest rate is 10% per annum, and the volatility is 30% per annum. Show PV of dividend and calculated values of d1 and d2.

1. Calculate PV of dividend.

2. Show value of d1.

3. Show value of d2.

4. Calculate the price of the put option.

3) A portfolio manager in charge of a portfolio worth $8 million is concerned that the market might decline rapidly during the next six months and would like to use options on the S&P 100 to provide protection against the portfolio falling below $7 million. The S&P 100 index is currently valued at 400 and each contract is on 100 times the index.

1. If the portfolio has a beta of 1, how many put option contracts should be purchased?

2. If the portfolio has a beta of 1, what should the strike price of the put options be?

3. If the portfolio has a beta of 0.5, how many put options should be purchased

4) A call option on an asset has a delta of 0.3. A trader has sold 3,000 options and wants to create a delta-neutral position.

1. Should the trader take a long or short position in the asset?

2. How many units of the asset should be bought or sold?

5) Some investor/speculators recognized the weaknesses inherent in the usage of CDOs during the time of the Crisis and made profits on the order of tens or hundreds of millions of dollars by betting against the markets. Briefly describe how they did this. What was the ultimate source of their profits? Should the U.S. government have instituted a “Windfall Profits Tax” on these individuals and used the money to repair the financial damage caused during the crisis?

Paper#7242 | Written in 20-Dec-2015

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