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Topic 8 Warm Up Problems with Solutions

# Topic 8 Warm Up Problems with Solutions - Warm up Problems...

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Warm up Problems for Topic 8 (Options) **These questions are designed to represent elementary principles, and are NOT representative of problems that you will find on any exams. 1. Draw payoff diagrams for the following: 1a) Buying a \$50 call option with a premium of \$3.00 \$50 call w/ \$3 premium -10 0 10 20 30 40 50 0 50 100 Stock Price Payoff \$50 call w/ \$3 premium 1b) Buying a \$30 put option with a premium of \$5.00 -10 -5 0 5 10 15 20 25 30 0 30 60 Stock Price Payoff \$30 put w/ \$5 premium

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1c) Writing a \$40 call option with a premium of \$6.00 -40 -30 -20 -10 0 10 0 40 80 Stock Price Payoff write a \$40 call w/ \$6 premium 1d) Writing a \$20 put option with a premium of \$2.00 -20 -10 0 10 0 20 40 Stock Price Payoff write a \$20 put w/ \$2 premium 2. Someone offers you a call option with three months to maturity for \$2.00. The strike price is \$40 and the underlying stock is currently trading for \$35. If the risk free rate is 4% and the stock does not pay dividends, at what price must the identical put option be trading for? P=C-Se -dT +Ke -rT P= \$2-\$35e -0*.25 +\$40e -(.04)(.25) P=\$2-\$35+\$39.60 P=\$6.60
3. What is the dividend yield of the underlying stock if a \$58 put option with 6 months to maturity is selling for
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Topic 8 Warm Up Problems with Solutions - Warm up Problems...

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