1. Consider a dividend paying stock currently traded at $22. A European call option on the stock with a strike of $25 that matures in 1 year is priced at $7. A European put on the same stock with a strike of $25 that matures in 1 year is priced at $3. Assume that a dividend with a present value of $4 is to be paid in 6 months time. The risk-free rate is 8% p.a. continuously compounded with a flat term structure.

To 2 decimal places, which of the following statements is true? An arbitrageur will

1. Buy the stock and put, and sell the call and bonds. The profit at maturity is $9.08.
2. Buy the stock and put, and sell the call and bonds. The profit at maturity is $5.08.
3. Buy the stock and put, and sell the call and bonds. The profit at maturity is $9.83.
4. Sell the stock and put, and buy the call and bonds. The profit at maturity is $5.50.
5. None of these answers.

E

B

D

C

A

2. A company will buy 500 units of a certain commodity in one year. It decides to hedge 50% of its exposure using futures contracts. The spot price and the futures price are currently $55 and $60 respectively. The spot price and the futures price in one year turn out to be $45 and $55 respectively. What is the average price paid for the commodity?

1. $50
2. $60
3. $47.50
4. $55
5. None of the above

E

A

C

D

B