Question 1:

A risk manager is considering writing a 6month Europeanstyle put option on a non dividend paying stock XYZ. The current stock price is $30, and the strike price of the option is $ 32. The stock can go up or down by 15% in each 3month period. The managers view is that the stock price has a 60% probability of going up each period and 40% probability of going down each period. Annual riskfree rate is 4%. What is the noarbitrage price of this 6 month put option?

Question 2:

An Italian importer has to pay its British supplier GBP 80 million in 6 months. The importer wants to control the cost to not more than Euro 96 million. 1) Discuss how the firm can use futures and options respectively to achieve this. Be specific in the contract terms. 2) What are the differences of the hedging result between using futures and using options respectively?