1. An investor sells a European call on a share for $4. The stock price is $47 and the strike price is $50. Under what circumstances does the investor make a profit? Under what circumstances will the option be exercised? Draw a diagram showing the variation of the investors profit with the stock price at the maturity of the option.

2. A trader writes 5 naked put option contracts with each contract being on 100 shares. The option

price is $10, the time to maturity is 6 months, and the strike price is $64.

a. What is the margin requirement if the stock price is $58?

b. How would the answer to (a) change if the stock price were $70?

c. How would the answer to (a) change if the trader is buying instead of selling the

options?