Question 9

1. Emmanuel holds a one-year call option on Shoprite common stock. The call option can be exercised at K15. Assume that the expiration date has arrived. What is the value of the Shoprite call option on the expiration date if:

1. Shoprite common stock is selling at K20 per share?
2. Shoprite common stock is selling at K10 per share?

2. A trader buys a European put on a share for K3. The stock price is K42 and the strike price is K40.

1. State the circumstances under which the trader will make a profit.
2. State the circumstances under which the option will be exercised.
3. Draw a diagram in support of your answers above, showing the variation of the traders profit with the stock price at the maturity of the option.