20.8 * Business Application: Pricing Call and Put Options: In the text, we mentioned contracts called “call”

and “put” options as examples of somewhat more sophisticated ways in which one can take a short or long position in the market.

A. Suppose, as in exercise 20.7, that the current price of oil is $50 a barrel. There are two types of contracts one can buy: The owner of contract 1 has the right to sell 200 barrels of oil at the current price of $50 a barrel one year from now. The owner of contract 2 has the right to buy 200 barrels of oil at the current price of $50 a barrel a year from now. Assume in this exercise that the annual interest rate is 5%.