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1. Consider the following information. You want to price a call option for HP, INC. The call will be expiring one year today. You want to use quarters to value the call (90-Day periods) (HPQ). Thus, you will use a four-period binomial option pricing model. You can observe the following:

S₀ = $18.90

Rf = 1.5%

Estimated Quarterly Up return: 5.25%

Strike Price of Call = $18.15

Given these assumptions what would be the price of the call today? 8 points

2. Suppose you are interested in investigating the option price efficiency of Altria Group, Inc. (MO) listed options. You look at options expiring in January of 2020, which is close enough to one quarter for your purposes. You observe the following prices listed for the options (below). Are the options efficiently priced, how do you know (2 pts)? Hint look at a box spread with strikes at $60 and $70. If the options are not priced correctly, ignoring trading costs, what is the arbitrage profits that could be made from the trade? (2 pts) The risk-free rate is the same as in question #1.

3. The cooked up spread. You have been doing research on Ford Motor Company (F). You note that Ford is currently trading at $9.35. After doing some analysis you feel that a fair price range over the next year for Ford is between $15 and $17. You however, are unsure if you wish to invest in Ford over a long horizon and feel that an options trade may be most appropriate. You see that there are listed options with a June 26^th expiration and that these would work for your purposes. You decide that you want to long one call with a $10 strike, you also decide that you dont want to spend much money entering the trade, so you short 10 calls with a strike of $15 as this aligns with your price range on F. What is the dollar outlay on this trade, max profit, and max loss (3 pts, one point per answer)? In your opinion is the potential profit with the risk (one point)? Now, what if instead you also buy 9 calls with a strike of $17 which was on the high side of your price estimate. What would be the max loss, max profit, and the two break even points if this is the trade you set up (4 points, one point per)?

Contract Name MO190118C00060000 MO190118C00062500 MO190118C00065000 MO190118C00067500 MO190118C00070000 Last Strike Price $60.00 $4.90 $62.50 $3.47 $65.00 $2.35 $67.50 $1.50 $70.00 $0.99 Bid Ask $4.80 $4.95 $3.30 $3.50 $2.17 $2.35 $1.39 $1.58 $0.90 $1.00 MO190118P00060000 MO190118P00062500 MO190118P00065000 MO190118P00067500 MO190118P00070000 $60.00 $62.50 $65.00 $67.50 $70.00 $2.20 $2.11 $2.26 $3.18 $3.25 $3.35 $5.20 $4.45 $4.85 $8.05 56.25 $7.25 $9.82 $8.35 $9.05 Caks for June 21, 2019 Contract Name F190621C00005000 F190621C00008000 F190621C00010000 F190621C00012000 F190621C00015000 F190621000017000 F190621C00020000 F190621C00022000 Strike $ 5.00 $ 8.00 $ 10.00 $12.00 $15.00 $ 17.00 $ 20,00 $22.00 Last Price $ 4.40 $ 1.59 $ 052 $ 0.15 $ 0.05 $ 0.03 $ 0.02 $ 0.02 Bid Ask $ 4.30 $ 4.40 $ 1.54 $ 1.58 $ 0.49 $ 0.53 $ 0.14 $ 0.15 $ 0.04 $ 0.05 $ 0.01 $ 0.04 $ 0.01 $ 0.03 $ - $ 0.04 Open Interest 171 4,242 14,986 52,671 2,753 1,015 242 654

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