1.A portfolio we have talked about recently consists of (1) buying a European call on a security having exercise price E and (2) simultaneously buying a Treasury security having face E (same as exercise price of the call) and discount-to-face ratio . a. What would be the payoff pattern on this portfolio? b. Explain how a dealer could short this portfolio and what the payoff pattern would be.

2. Consider the following portfolio: buy a call at the premium V_c and buy a Treasury bill having price-per-face of and face of E, where E is the exercise price of the option. Now show how you would short this portfolio. What is the payoff pattern? Explain.

3. A security has a price equal to the exercise price on its European call option. Which is higher: the premium on the call with the same exercise price, or the premium on the put with the same exercise price? Explain.