Stock ABC is currently standing at 1,508. Consider the corresponding stock options that expire in 90 days. The current Treasury Bills have a risk-free annual rate 2 percent. On the market, the calls and puts listed for ABC have an exercise price of 1,550.

(a) Assume there are no dividends paid for stock ABC. (i) Explain the payoff diagrams for the put & call options for both European options and American options.

Explain whether an increase in volatility would have impacts on profits/payoffs diagrams of puts on stock ABC. If you are a hedger, why would you continue to buy such put options with increased uncertainty? Explain.