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25. The following table lists prices of options on IBM stock. Stock Time to Exercise (months) Exercise Price Stock Price Put Price Call Price IBM 1 120 126 2 8 a. Using the information above derive the implied monthly interest rate. b. Draw the position and profit diagrams for the following positions: i. Long position in a call. ii. Short position in a call. iii. Long position in a put. iv. Short position in a put. 26. The following table lists some prices of options on common stocks. The interest rate is 10 percent a year. Can you spot any mispricing? What could you do to take advantage of it? Stock Time to Exercise (months) Exercise Price Stock Price Put Price Call Price Furbish Lousewort 6 100 90 10.00 15.00 Quercus Alba 6 50 60 2.00 10.00 Fagus Sylvatica 3 50 50 4.60 8.00 Fagus Sylvatica 6 50 50 5.60 8.00 Fagus Sylvatica 12 10 50 0.0 40.00 27. You are long two calls on the same share of stock with the same exercise date. The exercise price of the first call is $40 and the exercise price of the second call is $60. In addition, you are short two otherwise identical calls, both with an exercise price of $50. Plot the payoff of this combination as a function of the stock price on the exercise date. What are your expectations about the stock?s price movement?

Class 9 25. The following table lists prices of options on IBM stock. Stock IBM Time to Exercise (months) 1 Exercise Price 120 Stock Price 126 Put Price 2 Call Price 8 a. Using the information above derive the implied monthly interest rate. b. Draw the position and profit diagrams for the following positions: i. Long position in a call. ii. Short position in a call. iii. Long position in a put. iv. Short position in a put. 26. The following table lists some prices of options on common stocks. The interest rate is 10 percent a year. Can you spot any mispricing? What could you do to take advantage of it? Stock Furbish Lousewort Quercus Alba Fagus Sylvatica Fagus Sylvatica Fagus Sylvatica Time to Exercise (months) 6 6 3 6 12 Exercise Price 100 50 50 50 10 Stock Price 90 60 50 50 50 Put Price 10.00 2.00 4.60 5.60 0.0 Call Price 15.00 10.00 8.00 8.00 40.00 27. You are long two calls on the same share of stock with the same exercise date. The exercise price of the first call is $40 and the exercise price of the second call is $60. In addition, you are short two otherwise identical calls, both with an exercise price of $50. Plot the payoff of this combination as a function of the stock price on the exercise date. What are your expectations about the stock's price movement? 9