3.John buys a one year 50 strike European call option from Joe for a premium of $7.43. The risk free interest rate is 6.5% effective. For what spot price at expiration is Joes profit ?

6.A flood insurance policy with a deductible D covers flood damage to a house with a current market value of $400,000. The premium for the policy is $6,000. The house sustains $150,000 in flood damages. The "profit" to the policy owner from ownership of the insurance policy is $122,500 (ignoring interest on the premium).

(a) Determine D. (b) What amount of flood damage would result in a profit of $0?

4. With respect to a forward contract on an underlying stock index, which of the following positions will benefit from an increase in the price of the underlying stock index? ( ) (I) A long position in the forward contract; (II) A short position in the forward contract;

(III) A long position in the underlying index (A) (I) only (B) (II) only (C) (III) only (D) (I) and (III) only

5. Mark writes a one year European put with a strike price of X and a premium of $8.78. The risk free rate of interest is 4.8% effective per annum. Marks profit at a spot price at expiration of $85 is $1.83. Determine X. ( ) (A) $73.97 (B) $77.63 (C)$92.37 (D) $96.03

6. Which of the following derivatives would help to insure a company against declines in the price of a product that it sells?

(I) Long forward contract;

(II) Purchased call; (III) Written put

(A) (I) only

(B) (II) only

(C) (III) only

(D) The correct answer is not given by (A), (B) or (C).