QUESTION 3.

a. You buy a 1-year put option and sell the corresponding call option. Both options are written on 1 share of IBM stock and both have an exercise price of $92. In addition, you also buy 1 share of IBM stock. What is the net payoff you receive from this 3-asset portfolio if at expiration the price of each share of IBM stock is $41?

b. A European PUT option written on one share of Deadwood Lumber Co. stock has the following parameter values: S = $28, X = $30, r = 5% p.a., = 30% p.a., T = 9 months. Find the premium of this option, rounded to 2 decimals (e.g., 1.15; do NOT include a dollar sign in your answer). NOTE: Use the continuous time version of the Black-Scholes and Put-Call Parity equations (i.e., do NOT use the book's version).

c. A put option expires $11 in the money, meaning that the option's payoff is $11. What is the payoff at expiration of the "corresponding" call option; that is, a call option with the exact same parameter values as the put option?