1. Calculate the net profits of each option under the following assumption. Also indicate if the option is ITM, ATM, or QTM.
Strike price of options = $100
Premium of options =$10
a.) Long position of Call option if the stock price is $125 and if the stock price is $85.
b.) Short position of Put option if the stock price is $125 and if the stock price is $85.
2. You expect the IBM to hit $120 per share with expected dividends of $2.50 in one year. Its current price is $105 and your research estimates the beta at 1.15. Market risk premium is .07 and the U.S. T-bill is expected to yield .05. Is the IBM a good investment? Conduct security analysis using CAPM. Can you also explain your answers.
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