Students are to answer ALL parts of this question.

a) FoSho Muzik Ltd pays dividends at the end of each quarter that are constantly growing

by 2% p.a. compounded quarterly. If the dividend paid exactly three months ago was

7, and another dividend has just been paid yesterday, what is the annual

effective required rate of return on FoSho Muzik Ltd shares if the share price today is

$162? (8 marks)

b) The ordinary shares of Chonkz Ltd are selling for $45. A 48week put option written on

Chonkz stock is selling for $3.50. The puts exercise price is $51. The riskfree rate is

8% p.a. compounded semiannually.

i.

Suppose that calls on Chonkz stock are not traded (on either an exchange or

the OTC market). Using the above information, explain how to create a

portfolio that has an identical payoff as a call option with 48 weeks to expiry

and an exercise price $51. (10 marks)

ii.

Suppose that calls are traded. What should a 48week call option with an

exercise price of $51 sell for? Be sure to show your calculations. (3 marks)

iii.

Now assume it is 20 weeks before expiration and Chonkz Ltd share options are

American in nature. How can a holder of a Chonkz put option traded on the

ASX liquidate their position prior to expiration? In describing the two ways the

holder can liquidate, outline the overall profit that can be obtained for each

way, assuming the market price for Chonkz with 20 weeks to expiry is $53, the

put premium is now $2.10 and each contract is written on 50 shares. In your

answer, define the two ways in words, and then make sure to include all

payments prior to, and including at liquidation. (8 marks)