c

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c) The stated annual 1 month interest rate is 1.80%. You wish to price a 1 month at-the money European put option on stock C. You believe that every month, stock C will either rise in price by 2% or fall in price by 1.5%. One share of C is currently priced at 375p. Stock C is not expected to pay a dividend over the coming months. i. Use the risk-neutral method to work out the fair premium for the put. [5 marks] ii. If you wished to construct a risk-free portfolio containing one of the put options described above and a position in the underlying stock C, how many units of C would you need to hold? [ 3 marks] iii. A colleague wishes to gamble on the possibility that stock C will be very volatile over the next 1 month and thus wishes to construct an at-the-money straddle position. Compute the cost of the straddle, then draw the profit profile that your colleague will obtain from purchasing it and explain how it allows her to bet on volatility. [5 marks] c=S+Px/(1+r) C 3.530419 Cost of straddle is c+p c) The stated annual 1 month interest rate is 1.80%. You wish to price a 1 month at-the money European put option on stock C. You believe that every month, stock C will either rise in price by 2% or fall in price by 1.5%. One share of C is currently priced at 375p. Stock C is not expected to pay a dividend over the coming months. i. Use the risk-neutral method to work out the fair premium for the put. [5 marks] ii. If you wished to construct a risk-free portfolio containing one of the put options described above and a position in the underlying stock C, how many units of C would you need to hold? [ 3 marks] iii. A colleague wishes to gamble on the possibility that stock C will be very volatile over the next 1 month and thus wishes to construct an at-the-money straddle position. Compute the cost of the straddle, then draw the profit profile that your colleague will obtain from purchasing it and explain how it allows her to bet on volatility. [5 marks] c=S+Px/(1+r) C 3.530419 Cost of straddle is c+p