a. Explain the put-call parity (equation 8-2) relationship in the context of market efficiency. Then, elaborate (See Section 8-6 of the text) what individual variables effect the market price of a put and a call and in what direction?

b. How do options offered as part of a compensation package help mitigate the agency problems of a firm? How can options help with a firms risk management? Explain a firms capital structure (long term debt and equity choices) in terms of options.

Table 8-2 Portfolio Payoffs Put Stock Payoff at Expiration If: Prax PT2X X-P1 0 PT PT PT Portfolio 1: Call Cash ode PT - X PT Portfolio 2: