1) Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity.

(a) Ignoring the time value of money, under what circumstances will the holder of the option make a profit?

(b) Under what circumstances will the option be exercised?

(c) Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option..

2) Suppose that a European put option to sell a share for $60 costs $8 and is held until maturity.

(a) Ignoring the time value of money, under what circumstances will the seller of the option (the party with the short position) make a profit?

(b) Under what circumstances will the option be exercised?

(c) Draw a diagram illustrating how the profit from a short position in the option depends on the stock price at maturity of the option.

3) Explain why an American option is always worth at least as much as a European option on the same asset with the same strike price and exercise date.