Question 1 (Main question is question2)

Cathy is bullish on Tencent; so she instructs her broker to sell 15/7/2020 European 500 put options on Tencent with an exercise price of $400 each share. Sandy agrees to buy these options and pays the premium of $7 each option. Without taking any transaction costs into consideration,

1. what will be Sandys gain or loss if Tencents price is $385 each share on 15/7/2020? (2 marks)
2. what would be Cathys potential maximum loss on 15/7/2020? (2 marks)
3. what is Cathys break-even price? (2 marks)

Question 2

Re-visit Question 1. If the current price of each share is $380,

1. show how to determine Sandys initial margin.
2. show how to determine Cathys initial margin.