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a. Consider the following European type options quotes expiring in one month on Diwan plc shares, which are currently trading at 1.019 per share. Show all step- by-step calculations for each part. May 4 20X0 Calls () Strike() Puts () Settle Last Bid Ask Bid Ask Last Settle 0.25 0.25 0.25 0.30 0.80 0.05 0.05 0.15 0.15 0.10 0.20 1.00 0.05 0.10 0.10 0.10 0.05 0.05 0.10 1.20 0.15 0.25 0.20 0.20 0.05 0.05 1.40 0.35 0.40 0.45 0.40 Required (show all step-by-step calculations for each part): i. An investor is considering buying 1000 shares in Diwan plc at the end of May 20x0, as he will have enough cash at that time. He is concerned that the share price could go above 1.20 per share. How could he hedge this risk today? What will be the cost? ii. If the price of each share turns out to be 1.40 on the expiration date, what will be the payoff and profit from his position taken in part (i)? What will be the payoff and profit from his investment if the share price turns out to be 1.05? iii. Another investor owns 1500 shares of Diwan plc and is concerned that the share price could go below 0.80 per share at the end of May 20X0. How could she hedge this risk today? What will be the cost? How much maximum gain can she make? iv. If the price of each share turns out to be 0.64 on the expiration date, what will be the payoff and profit from her position taken in part (ii)? What will be the payoff and profit from her investment if the share price turns out to be 0.85? v. What is the break-even price for the option in part (ii) i.e. the share price that results in zero profit for the investor? [15 + 15 + 20 + 13 + 12 = 75 marks] b. Briefly outline the factors and the direction in which these factors affect call option prices Word Count 165-200 [25 Marks] Total [75 + 25 = 100 marks]

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