1. Consider a call option selling for $4 in which the exercise price is $50.

A. Determine the value at expiration and the profit for a buyer under the following outcomes:
i. The price of the underlying at expiration is $55.
ii. The price of the underlying at expiration is $51.
iii. The price of the underlying at expiration is $48.
B. Determine the value at expiration and the profit for a seller under the following outcomes:
i. The price of the underlying at expiration is $49.
ii. The price of the underlying at expiration is $52.
iii. The price of the underlying at expiration is $55.
C. Determine the following:
i. The maximum profit to the buyer (maximum loss to the seller)
ii. The maximum loss to the buyer (maximum profit to the seller)
D. Determine the breakeven price of the underlying at expiration.
2. Suppose you believe that the price of a particular underlying, currently selling at $99, is
going to increase substantially in the next six months. You decide to purchase a call option
expiring in six months on this underlying. The call option has an exercise price of $105 and
sells for $7.
A. Determine the profit under the following outcomes for the price of the underlying six months from
now.
i. $99
ii. $104
iii. $105
iv. $109
v. $112
vi. $115
B. Determine the breakeven price of the underlying at expiration. Check that your answer is
consistent with the solution to Part A of this problem.
3. Consider a put option on the Nasdaq 100 selling for $106.25 in which the exercise price is
2100. I
A. Determine the value at expiration and the profit for a buyer under the following outcomes:
i. The price of the underlying at expiration is 2125.
ii. The price of the underlying at expiration is 2050.
iii. The price of the underlying at expiration is 1950.
B. Determine the value at expiration and the profit for a seller under the following outcomes:
i. The price of the underlying at expiration is 1975.
ii. The price of the underlying at expiration is 2150.
C. Determine the following:
i. The maximum profit to the buyer (maximum loss to the seller)
ii. The maximum loss to the buyer (maximum profit to the seller)
D. Determine the breakeven price of the underlying at expiration.
4. Suppose you believe that the price of a particular underlying, currently selling at $99, will
decrease considerably in the next six months. You decide to purchase a put option expiring in
six months on this underlying. The put option has an exercise price of $95 and sells for $5.
A. Determine the profit for you under the following outcomes for the price of the underlying six months from
now:
i. $100
ii. $95
iii. $93
iv. $90
v. $85
B. Determine the breakeven price of the underlying at expiration. Check that your answer is consistent with the
solution to Part A of this problem.

C. Determine the following:
i. What is the maximum profit that you can have?
ii. At what expiration price of the underlying would this profit be realized?
5. You simultaneously purchase an underlying priced at $77 and write a call option on it with
an exercise price of $80 and selling at $6.
A. What is the term commonly used for the position that you have taken?
B. Determine the value at expiration and the profit for your strategy under the following outcomes:
i. The price of the underlying at expiration is $70.
ii. The price of the underlying at expiration is $75.
iii. The price of the underlying at expiration is $80.
iv. The price of the underlying at expiration is $85.
C. Determine the following:
i. The maximum profit
ii. The maximum loss
iii. The expiration price of the underlying at which you would realize the maximum profit
iv. The expiration price of the underlying at which you would incur the maximum loss
D. Determine the breakeven price at expiration.
6. Suppose you simultaneously purchase an underlying priced at $77 and a put option on it,
with an exercise price of $75 and selling at $3.
A. What is the term commonly used for the position that you have taken?
B. Determine the value at expiration and the profit for your strategy under the following outcomes:
i. The price of the underlying at expiration is $70.
ii. The price of the underlying at expiration is $75.
iii. The price of the underlying at expiration is $80.
iv. The price of the underlying at expiration is $85.
v. The price of the underlying at expiration is $90.

C. Determine the following:
i. The maximum profit
ii. The maximum loss
iii. The expiration price of the underlying at which you would incur the maximum loss
D. Determine the breakeven price at expiration.
7. You are bullish about an underlying that is currently trading at a price of $80. You choose
to go long one call option on the underlying with an exercise price of $75 and selling at $10,
and go short one call option on the underlying with an exercise price of $85 and selling at $2.
Both the calls expire in three months.
A. What is the term commonly used for the position that you have taken?
B. Determine the value at expiration and the profit for your strategy under the following outcomes:
i. The price of the underlying at expiration is $89.
ii. The price of the underlying at expiration is $78.
iii. The price of the underlying at expiration is $70.
C. Determine the following:
.i. . The maximum profit 11. The maximum loss
D. Determine the breakeven underlying price at expiration of the call options.
E. Verify that your answer to Part D above is correct.
8. You expect a currency to depreciate with respect to the U.S. dollar. The currency is
currently trading at a price of $0.75. You decide to go long one put option on the currency
with an exercise price of $0.85 and selling at $0.15, and go short one put option on the
currency with an exercise price of $0.70 and selling at $0.03. Both the puts expire in three
months.
A. What is the term commonly used for the position that you have taken?
B. Determine the value at expiration and the profit for your strategy under the following outcomes:
i. The price of the currency at expiration is $0.87.
ii. The price of the currency at expiration is $0.78.
iii. The price of the currency at expiration is $0.68.
C. Determine the following:
i. The maximum profit
ii. The maximum loss
D. Determine the breakeven underlying price at the expiration of the put options.
E. Verify that your answer to Part D above is correct.
9. A stock is currently trading at a price of $1 14. You construct a butterfly spread using calls
of three different strike prices on this stock, with the calls expiring at the same time. You go
long one call with an exercise price of $1 10 and selling at $8, go short two calls with an
exercise price of $1 15 and selling at $5, and go long one call with an exercise price of $120
and selling at $3.
A. Determine the value at expiration and the profit for your strategy under the following outcomes:
i. The price of the stock at the expiration of the calls is $106.
ii. The price of the stock at the expiration of the calls is $1 10. I
iii. The price of the stock at the expiration of the calls is $1 15.
iv. The price of the stock at the expiration of the calls is $120.
v. The price of the stock at the expiration of the calls is $123.
B. Determine the following:
i. The maximum profit
ii. The maximum loss
iii. The stock price at which you would realize the maximum profit
iv. The stock price at which you would incur the maximum loss
C. Determine the breakeven underlying price at expiration of the call options.
10. A stock is currently trading at a price of $1 14. You construct a butterfly spread using puts
of three different strike prices on this stock, with the puts expiring at the same time. You go
long one put with an exercise price of $1 10 and selling at $3.50, go short two puts with an
exercise price of $1 15 and selling at $6, and go long one put with an exercise price of $120
and selling at $9.
A. Determine the value at expiration and the profit for your strategy under the following outcomes:
i. The price of the stock at the expiration of the puts is $106.
ii. The price of the stock at the expiration of the puts is $1 10.
iii. The price of the stock at the expiration of the puts is $1 15.
iv. The price of the stock at the expiration of the puts is $120.
v. The price of the stock at the expiration of the puts is $123.
B. Determine the following:
i. The maximum profit
ii. The maximum loss
iii. The stock price at which you would realize the maximum profit
iv. The stock price at which you would incur the maximum loss
C. Determine the breakeven underlying price at expiration of the put options.
D. Verify that your answer to Part C above is correct.
11. A stock is currently trading at a price of $80. You decide to place a collar on this stock. You
purchase a put option on the stock, with an exercise price of $75 and a premium of $3.50.
You simultaneously sell a call option on the stock with the same maturity and the same
premium as the put option. This call option has an exercise price of $90.
A. Determine the value at expiration and the profit for your strategy under the following outcomes:
i. The price of the stock at expiration of the options is $92.
ii. The price of the stock at expiration of the options is $90.
iii. The price of the stock at expiration of the options is $82.
iv. The price of the stock at expiration of the options is $75.
v. The price of the stock at expiration of the options is $70.
B. Determine the following:
i. The maximum profit
ii. The maximum loss
iii. The stock price at which you would realize the maximum profit
iv. The stock price at which you would incur the maximum loss
C. Determine the breakeven underlying price at expiration of the put options.
12. You believe that the market will be volatile in the near future, but you do not feel
particularly strongly about the direction of the movement. With this expectation, you decide
to buy both a call and a put with the same exercise price and the same expiration on the
same underlying stock trading at $28. You buy one call option and one put option on this
stock, both with an exercise price of $25. The premium on the call is $4 and the premium on
the put is $1.
A. What is the term commonly used for the position that you have taken?
B. Determine the value at expiration and the profit for your strategy under the following outcomes:
i. The price of the stock at expiration is $35.
ii. The price of the stock at expiration is $29.
iii. The price of the stock at expiration is $25.
iv. The price of the stock at expiration is $20.
v. The price of the stock at expiration is $15.
C. Determine the following:
i. The maximum profit
ii. The maximum loss
D. Determine the breakeven stock price at expiration of the options.
13. Consider a box spread consisting of options on a stock trading at $27.95. The options have
exercise prices of $25 and $30, and they mature in six months. The call options for the
exercise prices of $25 and $30 have a premium of $5.30 and $2.75, respectively. The put
options for these exercise prices have a premium of $2.00 and $4.30, respectively. What
should the discrete risk-free rate be if these options are correctly priced?
14. World Scanners, Inc. is a U.S. corporation that occasionally undertakes short-term
borrowings in U.S. dollars with the rate tied to LIBOR. The 90-day LIBOR on 18 May is 6
percent. The company determines on this day that it will borrow $10 million at LIBOR plus
200 basis points on 15 July. The loan will be a pure discount loan to be repaid with a single
payment of principal and interest 90 days later. To protect against increases in LIBOR
between 18 May and 15 July, the company buys a call option on LIBOR with an exercise rate
of 5.5 percent to expire on 15 July with the underlying being 90-day LIBOR. The call premium
is $25,000. Complete the table below for a range of possible LIBORs on 15 July.
Labor on Loan Interest Effective Effective
15 July Loan Rate Paid 13 October Call Payoff interest Loan Rate
0.015
0.030
0.045
0.060
0.075
0.090
15. on 15 March, Techies, Inc. determines that it will need to borrow $3,000,000 at LIBOR plus
3 percent on 1 May. The 180-day LIBOR on 15 March is 5.5 percent. The loan will be a pure
discount loan to be repaid with a single payment of principal and interest 180 days later. To
protect against increases in LIBOR between 15 March and 1 May, the company buys a call
option on LIBOR with an exercise rate of 5.25 percent to expire on 1 May with the underlying
being 180-day LIBOR. The call premiums $8,000. What is the effective ceiling on the rate on
the loan as a result of the strategy adopted by Techies, Inc.?
16. Lenders, Inc. makes loan commitments to corporations. On 16 April, it makes a
commitment to lend $100 million at 180-day LIBOR plus 250 basis points on 1 June, , which is
46 days later. Current LIBOR is 6.5 percent. The loan will be a single payment loan made on 1
June; the principal and interest will be repaid 180 days later on 28 November. To protect
itself against the risk that LIBOR will fall by the date the loan is taken out, Lenders, Inc.
protects itself by purchasing an interest rate put, with an exercise rate of 6.25 percent to
expire on 1 June with the underlying being 180-dayLIBOR. The put premium is $120,000.
Complete the table below for a range of possible LIBORs on 1 June.
Labor on Loan Interest Effective Effective
1 July Loan Rate Paid 28 Nov Putt Payoff interest Loan Rate
0.015
0.030
0.045
0.060
0.075
0.090
0.105
17. Consider a company that borrows in the floating-rate instrument market. It takes out a
$10 million one-year loan on 1 March. The loan is an interest-only loan, requiring quarterly
interest payments on the first day of each corresponding month: 1 June, 1 September, 1
December, and 1 March of the following year, with the full principal payment at the end. The
interest rate is 90-day LIBOR plus 200 basis points. Current 90-day LIBOR is 7 percent, which
sets the rate for the first three-month period at 9 percent. The rates are reset every three
months. To protect itself against the risk of increases in interest rates when the rates are
reset, the company purchases an interest rate cap with an exercise rate of 7.25 percent. The
component caplets expire on the rate reset dates. The cap premium, paid up front on 1
March, is $25,000. Determine the effective interest payments if LIBOR on the following dates
are as given:
1 June: 7.25 percent
1 September: 7.50 percent
1 December: 8.00 percent
18. Careful Bank is a lender in the floating-rate instrument market. It uses fixed-rate financing
on its floating-rate loans and buys floors to hedge the rate. It makes a $20 million one-year
loan on 16 July. The loan is an interest-only loan, requiring quarterly interest payments on
the 16th day of each corresponding month: 16 October, and 16 January, 16 April, and 16 July
of the following year, with the full principal payment at the end on 16 July of the following
year. The interest rate is 90-day LIBOR plus 250 basis points. Current 90-day LIBOR is 6
percent, which sets the rate for the first three-month period at 8.5 percent. The rates are
reset every three months. To protect itself against the risk of decreases in interest rates when
the rates are reset, the company purchases an interest rate floor. The component floor lets
expire on the rate reset dates. LIBOR on the following dates turn out to be as given:
16 October: 5.25 percent
16 January: 5.50 percent
16 April: 5.75 percent
A. Determine the effective interest payments if the bank had purchased a floor with an exercise rate of 5.75
percent, with a premium of $50,000 paid up front on 16 July.
B. Determine the effective interest payments if the bank had purchased a floor with an exercise rate of 6.00
percent, with a higher premium paid up front on 16 July.
C. Determine the effective interest payments if the bank had purchased a floor with an exercise rate of 5.50
percent, with a lower premium paid up front on 16 July.
19. Technocrats, Inc. is a floating-rate borrower. It takes out a $20 million one-year loan on 1
March. The loan is an interest-only loan, requiring quarterly interest payments on the first
day of each corresponding month: 1 June, 1 September, 1 December, and 1 March of the
following year, and the full principal payment at the end. The interest rate is 90-day LIBOR
plus 1.5 percent. Current 90-day LIBOR is 6 percent, which sets the rate for the first three-
month period at 7.5 percent. The rates are reset every three months. Technocrats manages
the risk of rising interest rates over the life of the loan by purchasing an interest rate cap and
offsetting the cost of the cap by selling an interest rate floor. It chooses an interest rate cap
with an exercise rate of 6.25 percent. The component caplets expire on the rate reset dates.
To generate a floor premium sufficient to offset the cap premium, Technocrats sells a floor
with an exercise rate of 5.25 percent. Determine the effective interest payments if LIBOR on
the following dates are as given:
1 June: 6.50 percent
1 September: 5.50 percent
1 December: 5.00 percent
20. Consider the following information:
Stock price: $46
Exercise price of call options: $45
Call premium: $5
Delta: 0.5420
Number of calls sold: 1,000
Delta at the end of the previous day: 0.64
Continuously compounded risk-free rate: 4.5 percent.
A. How many shares of stock are needed to delta hedge the call position at the end of the previous day?
B. Suppose that at the end of the previous day, we had a loan balance of $3,000. What is the market value of
the portfolio today using the new information given above?
C. Show what transactions would need to be done to adjust the portfolio to be delta hedged for the following
day.
D. On the following day, the stock is worth $45.50 and the call is worth $4.71. Calculate the market value of the
delta-hedged portfolio and compare it with a benchmark, based on the market value computed in Part B above