Ed Martin, the pension fund manager for Stark Corporation, is considering purchase of a put

option in anticipation of a price decline in the stock of Carlisle, Inc. The option to sell 100

shares of Carlisle, Inc., at any time during the next 90 days at a strike price of $45 can be

purchased for $380. The stock of Carlisle is currently selling for $46 per share.

A. Ignoring any brokerage fees or dividends, what profit or loss will Ed make if he buys the

option and the lowest price of Carlisle stock during the 90 days is $46, $44, $40, and $35?

B. What effect would the fact that the price of Carlisle's stock slowly rose from its initial $46

level to $55 at the end of 90 days have on Ed's purchase?

C. In light of your findings, discuss the potential risks and returns from using put options to

attempt to profit from an anticipated decline in share price.

2. A 6-month call option on 100 shares of SRS Corp. stock is selling for $300. The strike price

for the option is $40. The stock is currently selling at $38 per share. Ignoring brokerage fees,

what price must the stock achieve to just cover the expense of the option? If the stock price

rises to $45, what will the net profit on the option contract be?

3. Suppose you wish to purchase or sell a share of stock in WYZ Corp. for $50. The stock is not

expected to pay a dividend during the time you plan to hold it, and you have forecast that in

one year the stock price will either rise to $65 or fall to $40. The Risk free rate is 8%.

A. Calculate Payoff and Probabilities of up & Down for call & put.

B. Calculate intrinsic Price for a single call & put.

C. Calculate hedge ratio for call & put.

D. Calculate intrinsic Price at hedge ratio for call & put.