On June 1, an investor short sells 500 shares of Company Y when the stock price was 120. Three months later (August 31), the investor closed out his position when the stock price was 100. Company Y paid 4 pounds dividend on each share on July 31.

i)Ignoring the effect of interest, calculate the net gain on the transaction, over 3 months.

[Marks: 25]

ii)Assume the investor is required to open a margin account on June 1. The margin account requires a deposit of 50% of the initial value of the short position. The margin account balance earns 1% interest per month (compounded monthly). Calculate the balance in the margin account 3- months after the short position was taken.

[Marks:25]

Using put-call parity, explain why the cost of a butterfly spread created with European puts is identical to the cost of a butterfly spread created with European calls

[Marks: 50]