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Problem 1
Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity.
Under what circumstances will the holder of the option make a profit? Under what circumstances will the
option be exercised? Draw a diagram illustrating how the profit from a long position in the option
depends on the stock price at maturity of the option.
Problem 2
A trader enters into a short cotton futures contract when the futures price is 50 cents per pound. The
contract is for the delivery of 50,000 pounds. How much does the trader gain or lose if the cotton price
at the end of the contract is (a) 48.20 cents per pound; (b) 51.30 cents per pound?
Problem 3
Suppose that c
1
, c
2
, and c
3
are the prices of European call options with strike prices K
1
, K
2
, and K
3
,
respectively, where K
1
< K
2
< K
3
and K
3
 K
2
= K
2
 K
1
. All options have the same maturity and underlying.
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This note was uploaded on 06/12/2011 for the course ACCOUNTING 121 taught by Professor Idntknow during the Spring '11 term at Yonsei University.
 Spring '11
 idntknow

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