1. Draw the payoff diagrams (at maturity) for the following combinations of ABC stock and its options. Assume all put and call options on ABC have the same strike price K = $100 and maturity T.

(a) Purchased (long) one share of ABC stock, sold (short) one call option.

(b) Short two shares of ABC stock, long three put options.

(c) Long one risk-free zero-coupon bond with a par value of $100 , short one call option.

(d) Long one share of ABC stock, short two call options, long one put option.

2. Suppose XYZ is a non-dividend-paying stock. The current stock price is S = $80, the volatility is = 35%, and the risk-free interest rate is r = 2%.

(a) Using the Black-Scholes-Merton formula or the Black-Scholes-Merton calculator, find the price of a three-year European call option on XYZ with a strike price of $70.

(b) Using put-call parity, and the price of a three-year European put option on XYZ with the same strike price. (Please show the calculation using put-call parity. Do not simply take the put value from a Black-Scholes-Merton calculator.)