4. Assume that the common stock of Luther Industries is currently traded for 47 per share. The stock pays no dividends. A 3-month European call option on Luther with a strike price of 45 is currently traded for 7.45. The risk-free rate interest rate is 2% per year. Assume that you own common stock of Luther Industries, but you are concerned about a decline in its stock price in the near future. a) Should you simply sell your holding? Why or why not? (4 %) b) Evaluate hedging the downside risk with options. What type of option should you use? Be specific, and show this strategy at maturity in a position (10 %) c) Suppose that put options on Luther Industries are not traded, but you want diagram. to have one. How could you achieve it? (Hint: design a strategy that uses a (8 %) d) Suppose that put options on Luther Industries stocks are traded. What no- combination of financial securities) arbitrage price should a 3-month European put option on Luther Industries (8 %) e) What is the minimum profit of your portfolio after you purchase this put (3% %) with an exercise price of 45 sell for? option? 4. Assume that the common stock of Luther Industries is currently traded for 47 per share. The stock pays no dividends. A 3-month European call option on Luther with a strike price of 45 is currently traded for 7.45. The risk-free rate interest rate is 2% per year. Assume that you own common stock of Luther Industries, but you are concerned about a decline in its stock price in the near future. a) Should you simply sell your holding? Why or why not? (4 %) b) Evaluate hedging the downside risk with options. What type of option should you use? Be specific, and show this strategy at maturity in a position (10 %) c) Suppose that put options on Luther Industries are not traded, but you want diagram. to have one. How could you achieve it? (Hint: design a strategy that uses a (8 %) d) Suppose that put options on Luther Industries stocks are traded. What no- combination of financial securities) arbitrage price should a 3-month European put option on Luther Industries (8 %) e) What is the minimum profit of your portfolio after you purchase this put (3% %) with an exercise price of 45 sell for? option