Emily does a lot of investing in the stock market and is a frequent user of stock-index options. She is convinced that the market is about to undergo a broad retreat and has decided to buy a put option on the S&P 100 Index. The put option has a strike of 905 and is quoted in the financial press at $14.50. Although the S&P Index of 100 stocks is currently at 900, Emily thinks it will drop to 850 by the expiration date on the option.

Required:

a. How much profit will she make if she is right? (4 marks)

b. What will be her holding period return if she is right?

c. How much will she lose if the S&P 100 goes up (rather than down) by 25 points and reaches 925 by the date of expiration?)