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=CSe
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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 Fall '09
 Options, Dividend, Strike price

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