a)Suppose you are a speculator. You own a portfolio that consists of a short position on a European call option on a share.

Required:

Sketch the position diagram and explain what it means. Show all the key points on the diagram. Assume no dividends are paid by the share.

[6 marks]

b)John is a speculator. He owns a portfolio that consists of a European call option and a European put option on the same share. Suppose the two options have the same expiry date and the same strike price;

Required:

I.Draw the position diagram and explain what it means.

[5 marks]

II.Use the diagram in part 1 to explain John's opinions about future share prices.

[5 marks]