1. Horstmeyer Section 2- Short Answer: 1. Suppose you purchase one IBM May 100 call contract at $6 and write (sell) one IBM May 110 call contract at $2. Draw the profil diagram associated with this strategy. (5 points) b) The maximum potential profit of your strategy is if the stock price goes to 120). if both options are exercised (i.c. c) If, at expiration, the price of a share of IBM stock is $103, your profit would be: d) What is the maximum that you can lose with this position you have created? Horstmeyer 2. Tim Cook receives compensation in the amount 1 million dollars in cash and 10,000 Apple Call options (Employee stock options - each call option represents 100 shares, as usual). These are the only options that he owns in Apple. It is currently June 15, 2017 and the options all expire on July 14, 2017. The current stock price for Apple is 99 dollars and all the options have an exercise price of 100 (S=99, X=100). Tim Cook is evaluating a project with the following terms: - 25% chance the project goes well and increases the stock price to 110. - 50% chance the project does ok and the stock price increases to 101. - 25% chance the project is a disaster and the stock price plummets to 68. a) Given his options holdings, what will Tim Cook's decision be? What is his expected payout if he does not take the project on? What is the expected payout in his options (expected dollar amount be will get) should he take on the project? Will he take the project or not take on the project? (6 points) b) If he decides to do the project, what are the expected payouts to shareholders (expected amount the stock will go up or down)?mobile in care c) If you were designing the pay package for Tim Cook (i.e. picking what form his compensation takes) what are two ways you could design his compensation so that his interests are aligned with those of the shareholders