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1. [2 marks] You are certain that a share of Apple, which is currently $400, will be worth $415 in 6 months. However, instead you
1. [2 marks] You are certain that a share of Apple, which is currently $400, will be worth $415 in 6 months. However, instead you could buy a 6-month bond that pays continuously compounded interest at a rate of 10% per an- num. To maximize your expected return, you should: A. Buy shares of Apple B. Invest in the bond C. Buy a lottery ticket 2. [2 marks] Your professor, on the other hand, is certain that Apple (cur- rently at $400) will be worth $400 in 6 months. You vaguely recall from a Math 3510H lecture that a straddle is a portfolio consisting of a call option and put option bought at the same strike price K and same expiry (i.e., the payoff diagram looks like a V). Assuming that K = $400, which of the following strategies would you advise him to try? (All options with 6 month maturity and strike price K.) A. Go long on a straddle B. Go short on a straddle C. Go long on a straddle and long a European put D. Go short on a straddle and long a European call 3. [2 marks] Suppose that the price of a European call is worth more than the stock itself (which violates an obvious upper bound). What kind of arbitrage opportunities are available to you: A. Short the call and go long on the stock B. Buy the call and go short on the stock C. Short the call and short the stock D. Buy the call and buy the stock 4. [2 marks] If the risk free interest rate increases, we expect the price of an option to (assuming all other things constant): A. Increase B. Decrease C. Not change
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