Suppose the following for European options: Stock price $94 3-month call options with strike price $97 3-month put option with strike price $98 l-year risk-free rate is 3%. The put option is trading at $5 and there is an identical call option that is trading for $4. The arbitrage gain that can be made is equal to: O a. $2.00 b. $0.27 Oc. $3.00 Od $1.27 O $2.27

European plain vanilla call options with strikes 30 and 35 on the same non- dividend paying asset with spot price $ 35 are trading for $ 11.50 and $ 7, respectively. Does arbitrage exist, and if so, how do you take advantage of it?

2. Calculate the put premium according to put-call parity which gives no arbitrage opportunity. Explain what transaction would you do if the put premium is below/above the put premium you calculated. European call option premium: c = $2 Stock price today: So- $30 Life of option: T=0.5 Risk-free rate for maturity T with continous compounding: r= 8% Strike price: K= Decide on the K value yourself (carefully). No dividends paid during life of option.

What is the value of d, of a European call option on a non-dividend-paying stock when the stock price is $60, the strike price is $59, the risk-free interest rate is 5% per annum the volatility (Standard Deviation) is 30% per annum, and the time to maturity is three months? c=SN(d,)-Ke-N(₂) where and O√T OA02704 OB0.2167 *√T OC.0.3561 OD.0.1204

(a) The table below gives information about European options with a maturity date of 6 months. Type Of option Strike Price Call 65 Call 58 Put 65 Premium 5 8 4 (i) Devise the payoff profile of the hedging strategy from the above for an investor betting on an increase in the stock price and calculate the payoff if the stock price increases to $66 after 6 months. (8 marks) (ii) Suppose that another investor expects a big stock price movement but is not sure of the direction. She however bets that the downward movement is more likely. Devise the corresponding trading strategy and calculate the payoff if the stock price is $55 after 6 months. (8 marks) (b) By analysing the pay off profiles of a protective put strategy and a straddle, discuss in what ways these strategies shield the investor from potential losses.

Suppose that an American put option with a strike price of $70.0 and maturity of 4.0 months costs $13.2. The underlying stock price equals 55. The continuously compounded risk-free rate is 8.5 percent per year. What is the potential arbitrage profit from buying a put option on one share of stock? 1.9783 no arbitrage profit available 3.8117 4.2693 1.80