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Question 2 (a) You are required to draw a gross profit diagram for an option...

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Question 2 (a) You are required to draw a gross profit diagram for an option contract. Draw a gross profit diagram for a short position in a call option at strike price of $100. (2.5 marks) (11) Also draw the gross profit diagram for a long position in a put option at the same strike and maturity as the call. (2.5 marks) (111) Overlay these plots on the same axis to get an aggregate payoff diagram for the portfolio of call and put. (2.5 marks) (iv) What other security do you know of with the same payoff diagram as this portfolio? (2.5 marks) (6) List the SIX (6) factors that affect stock option price. (6 marks) C Company Ann is paying no dividends. Its stock price is $30. The 3-month European call at strike $29 is trading at $3. The 3-month interest rate is 1%. (1) What is the price of a 3-month European put option? (3 marks) Explain why the arguments leading to put-call parity for European options cannot be used to give a similar result for American option? (3 marks) (111) What is the difference between an American and European option (3 marks) [Total: 25 Marks]

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