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4. (6 marks] Consider a European put option expiring in 1 year, with a strike price of $35, on a nondividend paying stock whose current

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4. (6 marks] Consider a European put option expiring in 1 year, with a strike price of $35, on a nondividend paying stock whose current value is $40, costs $1.85. Suppose that the zero-coupon bond paying $1 in one year trades at $0.95. (a) Sketch the payoff diagram for the covered put, as functions of the value (Sr) of the underlying asset at the expiry time T. (b) Calculate the Profit/Loss for the covered put and the naked put if the underlying stock worths $30 and $42, respectively. (c) When does the covered writer gains money? (d) Find the premium of the identical call and say why it is greater or less than the put premium (e) Explain how you might take advantage if the premium of the identical call is $8

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