Exercise 1. Suppose you think a stock will appreciate in value in one year. Current price is SD = $112M. Assume there is a call option for this stock. expiring in one year, with exercise price X = $1M, and selling price (2 = $1i]. With an amount of $10,000 to invest you consider three strate gies: 1. Invest all money buying stocks 2. Invest all money buying options 3. Buy 100 optionsr and invest the remaining in a money market fund paying 4% annual inter E51 What is the rate of return for each alternative For the following four stock prices in one year? Plot see 5100 $110 $123 the results in a graph of rate of return as a function of the price in one year. lilowr characterize the behavior of the hedge ratio in the limit as it gets farther in the money and as it gets farther out of the money, i.e.. do the following limits exist? 11111 H? text lim H? Sn i-oo Sn |~|J {Do not be concerned about providing a mathematical proofr I am more interested on your intu ition behind the price of the stock becoming really big or really small, and how this affects the ratio}. Exercise 3. Recall that the hedge ratio for an European call option is given by H Cu - Ca uSo - dSo Using the values from Exercise 1., explain why H 2 0 for the call, but H