1. Compute the ($) net profit or loss at expiration

for the following strategies in Lotus (55) Feb94 options.

a. (5 Points) Buy 1 Lotus (55) call:

b. (5 Points) Sell 1 Lotus (55) call:

c. (5 Points) Buy 1 Lotus (55) put:

d. (5 Points) Sell 1 Lotus (55) put:

In Excel, compute the expiration value for each of these alternatives using Lotus stock

values (at the Feb94 expiration) of $45, $50, $55, $60, and $65. (Evaluate the option

payoffs per share of Lotus stock.)

e. Graph each of the strategies above with Lotus stock values (at

expiration) on the horizontal axis, and $ profit and loss on the vertical axis.

2. Suppose you own Lotus stock to begin with. Evaluate how each of the

strategies in question 1 affect your overall exposure to the price of Lotus stock as of the

Feb94 expiration? Modify your Excel analysis to sum (1) the payoff to owning 1 share of

Lotus stock, plus, (2) the net option payoff per share to the options positions above

(a,b,c,d,e).

If I were to own Lotus stock to begin with,

3. Compare the premium for Lotus (55) Feb94 calls with AT&T (55) Feb94 calls.

Both stocks are trading at $55 per share. Explain the difference between Lotus and

AT&T options premium.

4.

Table A. Treasury Bill Yterm Sturcture as of Jan. 18, 1994 Maturity Date Daily Yield to Maturity Effective Compound Annual Yield Jan. 22, 1994 0.0075% 2.78% Feb. 19, 1994 0.0078% 2.89% Apr. 16, 1994 0.0084% 3.11% Jul. 16, 1994 0.0083% 3.08% Jan. 21, 1995 0.0081% 3.00% Jan. 20, 1996 0.0081% 3.00%