QUESTION FOUR

1. Tembo holds a one-year put option on Shoprite common stock. The put option can be exercised at K50. Assume that the expiration date has arrived and the premium is K3. What is the value of the Shoprite put option on the expiration date if:
   1. Shoprite common stock is selling at K56 per share?
   2. Shoprite common stock is selling at K45 per share?
2. A trader buys a call option on a share for K2. The stock price is K25 and the strike price is K20.
   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.