option and buying on margin

Problem 1 - Option (20 marks) 1. Why would a financial institution holding the stock of AIG CO. consider buying a put option on that stock rather than simply selling it? (5 marks) 2. A call option on Illinois stock specifies an exercise price of $38. Today, the stock's price is $40. The premium on the call option is $3. Assume the option will not be exercised until maturity, if at all. Complete the following table: (5 marks) Assumed stock price at the maturity Net profieless per share to be earned by writer (seller) of call option 37 39 41 43 3. Explain why greater volatility or a longer term to maturity leads to a higher premium on both call and put options. (5 marks) 4. In order for a derivatives market to function most efficiently, two types of economic agents are needed: hedgers and speculators. Explain briefly (5 murks) Problem 2 - Buying on Margin: (20 marks) 1. 100 shares are purchased on the margin at the beginning of the year for 540 per shure. The initial margin requirement was 50% Interest of 10% was paid on the margin loan. A dividend of 1 per share is received. Calculate the annual return if 2. The stock are sold for 550 and $30 per bare at the end of the year 18 marks) 3. Calculate the retam for (a) and (b) if the purchase had been made using cash instead of on the margin (5 marks) 4. If maintenance margin is 3500, how much can the stock falls before a margin call 15 marks) 5. Why do investors involve in margin trading 22 marks)