2. You purchase one IBM September 160 put contract for a premium of $2. 62. what is your maximum possible profit?

3. You establish a straddle on Walmart using September call and put option with a strike price of $50. The call premium is $4.25 and the put premium is $5.

a. What is the most you can loose on this option?

b. What will be your profit or loss if Walmart is selling for $58 in September?

c. At what stock price will you break even on the straddle?

4. The common stock of P.U.T.T. corporation has been trading in a narrow price range for the past month, and you are convinced that it is going to break far out of that range in the next three months. The current price of the stock is $100 per share, the price of the three month call option with a exercise price of $100 is $10 and a put with the same expiration date and exercise cost $7.

a. what should be a simple option strategy to exploit your conviction about the stock price future movements?

b. How far would the price have to move in either direction for you to make a profit on your initial investment?

5. A call option on Jupiter Motor stock with an exercise price of $75 and a one year expiration is selling at $3. A put option at Jupiter stock with an exercise price and a one year expiration is selling at $2.50. If the risk free rate is 8% and Jupiter pays no dividends, what should the stock price be?

6. Show that Black -Scholes call option hedge ratio increase as stock prices increase. Consider a one year option with a exercise price of $50 on a stock with annual standard deviation of 20%. The T-bill rate is 3% per year. Find N(d₁) for stock prices $45, $50, and $55.