FIN 561: DERIVATIVES & RISK MANAGEMENT ASSIGNMENT 1. Consider the three call options identical in every respect except for the strike price of GHS90, GHS100 AND GHS110. Specifically, the stock price is GHS100, the annually compounded risk free rate is 5%, and time to maturity is 1 year. Use a one-period binomial model with u=4/3 and d = 3/4. Calculate the p and h. Explain.

2. Consider the three call options identical in every respect except for the maturity of 0.5. 1, and 1.5. Specifically, the stock price is GHS100, the annually compounded risk free rate is 5%, and the strike price is GHS100. Use a one-period binomial model with u=4/3 and d = 3/4. Calculate the p and h. Explain.

3. The following prices are available for call and put options on a stock priced at $50. The risk-free rate is 6 percent and the volatility is 0.35. The March options have 90 days remaining and the June options have 180 days remaining. The Black-Scholes model was used to obtain the prices. C alls P uts Strike March June March June 45 6.84 8.41 1.18 2.09 50 3.82 5.58 3.08 4.13 55 1.89 3.54 6.08 6.93 Assume that each transaction consists of one contract (for 100 shares) unless otherwise indicated. For questions 1 through 6, consider a bull money spread using the March 45/50 calls. i. How much will the spread cost? ii. What is the maximum profit on the spread? iii. What is the maximum loss on the spread? iv. What is the profit if the stock price at expiration is $47? v. What is the breakeven point?

4. Explain why a straddle is not necessarily a good strategy when the underlying event is well known to everyone.