Some options trade on over-the-counter markets. The OTC market offers the advantage that the terms on the option contract (the exercise price, maturity date, and number of shares committed) can be tailored to the needs of the traders. The cost of the establishing an OTC option contract, however, are higher than for exchange-traded option. On the one hand, option contracts can be used as a means of hedging, but on the other hand, they can be used for speculation.

a. What will be the proceeds and net profits to an investor who purchases the March maturity Microsoft call with exercise price $45 if the stock price at maturity is $50?. What if the stock price at maturity is $40?

b. Now answer part (a) for an investor who purchases a March maturity Microsoft put option with exercise price $45?

c. Suppose that Microsofts stock price at the exercise date is $50, and the exercise price of the call is $45. What is the payoff on one option contract? (one option contract equivalent 100 shares).

d. Consider these four option strategies: (i) buy a call; (ii) write (or sell) a call; (iii) buy a put; (iv) write (or sell) a put. For each strategy, plot both the payoff and profit diagrams as a function of the final stock price.

e. A collar would be appropriate for an investor who has a target wealth goal in mind but is unwilling to risk losses beyond a certain level. If you are contemplating buying a house for $220,000 for example, you might set this figure as your goal. Your current wealth may be $200,000, and you are unwilling to risk losing more than $20,000. A collar established by (i) purchasing 2,000 shares of stock currently selling at $100 per share. (ii) purchasing 2,000 put option (20 option contract) with exercise price $90, and (iii) writing (or selling) 2,000 calls with exercise price $110, would give you a good chance to realize the $20,000 capital gain without risking a loss of more than $20,000. Graph the payoff diagram for the collar described in the paragraph above for the investor contemplating the purchase of a house