Options are often used in combination with stocks to reduce risk or to produce other avenues of revenue.

Buying protective puts guards against downside risk while allowing for upside potential.

Writing covered calls allow investors to earn premium income on a stock they expect to remain stable in price.

Wang Foo Ltd. has a current stock price of $80, does not pay dividends, and has an expected standard deviation of .30. Also, the risk-free rate is 10% per year, continuously compounded.

1. What is the European call option price and European put option price, for 100-share contracts expiring in 9 months, at a strike price of $70, according to the Black-Scholes-Merton model? Hint: Use Spreadsheet 21.1 from file Bodie_9Ce_Ch21.xlsx.
2. What is the cost of buying a protective put?
3. What is the cost of writing a covered call?
4. What will be the payoff and profit of the protective put if the stock price on maturity is $60, $70, $76, $80, $86?
5. What will be the payoff and profit of the covered call if the stock price on maturity is $60, $70, $76, $80, $86?