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Question 3 (a) Explain the option strategies of: (1) Covered call Protective put (3 marks) (3 marks) (b) a 7.85 Table 1. AP and BSF stock price with call and put options (May, Aug.Nov) Stock Price Strike Price Call Put May Aug Nov May Aug Nov AP 40 12.50 13 0.05 0.70 1.50 5212 45 7.75 8.65 10.50 0.20 1.753 5212 50 3 5.85 1.15 3.75 5.25 5212 60 0.25 2.45 4.15 8.65 9.90 10.40 5212 70 0.05 0.85 b 18.75 | 6 5212 80 0.45 b b 521/2 90 0.10 b b BSF 15 10.75 11 10 0.05 a 25 3/8 20 5.50 6 7.50 0.05 0.40 25 3/8 25 1.45 3.35 4.50 0.75 1.65 2.15 253/8 30 0.20 1.50 1.50 4.50 A a a a a a a a a a C Using the following information answer the following questions: (1) The BSF May call option has a premium of 0.20. What is the strike price of this option? (1 mark) (11) Determine whether BSF May 20 put option is at the money/out of money/in the money and justify your answer. (2 marks) (111) Determine whether AP May 40 call option is at the money/out of money/in the money and justify your answer. (2 marks) (iv) What is the intrinsic value of the BSF August 20 call options? (2 marks) (v) What is the time value of the BSF August 20 call options? (2 marks) (c) The CBOE is planning to open a new market center at London that will only trade European options and has hired you as consultant. The board of directors for the CBOE believes that there is demand in the market for options contracts that can be used by investors to insure their portfolio. The features of this particular market is that only put options will be traded. (1) Explain why it will be necessary to trade options in the market? (3 marks) (1) You are required to identify the important characteristics of the market and the option contracts that will ensure the success of this new market (5 marks) (iii) If you are managing your client's retirement portfolio and would prefer to limit the downside, what common option structure should you take? (2 marks) [Total: 25 Marks]

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