1. Explain why in a particular year interest rates are different for different interest-bearing assets. Explain why interest rates for a particular interest-bearing asset can change over a number of years.

1. Briefly explain why greater price volatility of an underlying share makes an option based on that share more valuable.

You own 50,000 shares in X PLC but you think the price might fall by 10% in the next month. However, you do not want to sell the shares, as this will incur a large tax bill. You decide to buy a protective put to offset the possible loss in the value of the shares. You obtain the following information: the current share price of X PLC is 2 per share and put options with a strike/exercise price of 1.90 with an expiry date next month cost 5p each.

1. How many put options should be bought to offset all of expected loss from the shareholding?