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Question 1: Use the data in the figure to calculate the payoff and the profits for investments in each of the following November 2019 expiration options, assuming that the stock price on the expiration date is $140. X = strike price.

A. Call option, X = $135.

B. Put option, X = $135.

C. Call option, X = $145.

D. Put option, X = $145.

Question 2: Suppose you think Dactyl stock is going to appreciate substantially in value in the next year. Dactyls current stock price, S0, is $100. The call option expiring in one year has an exercise price, X, of $100 and a selling price, C, of $10. You have $10,000 to invest in Dactyl and are considering three alternatives:

Invest all $10,000 in Dactyl stock, buying 100 shares.

Invest all $10,000 in 1,000 call options (thats 10 contracts for 100 shares each).

Buy 100 call options (one contract) for $1,000 and invest the remaining $9,000 in a money market fund paying 4% interest annually.

What is your rate of return for each alternative for four stock prices one year from now? ($80, $100, $110, $120)

Question 3:

Use the Black-Scholes formula to find the value of a call option on Delta stock:

Time to expiration = 6 months (1/2 a year)

Standard deviation = 50% per year

Exercise price = $50

Stock price = $50

Interest rate = 3% per year

Question 4: Use the Call and Put Relationship or the Black-Scholes formula to find the value of a put option on Delta stock with the same exercise price and expiration as the call option in the previous question.

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