1. The interest rate is 2% per annum with continuous compounding and a bank wants to create a $1,000 principal protected note using a five-year zero-coupon bond plus a five-year call option.

What is the maximum price of the call option that will make this product viable for the bank (answer in $ and round to the nearest cent)?

2. Call options with strike prices of $70 and $87 cost $16 and $12, respectively. An investor creates a bear spread by selling (writing) the call with a strike of $70 and buying the call with a strike of $87.

What is the investor's profit at expiration if the terminal spot price turns out to be $72?

3. Call options with strike prices of $70 and $87 cost $16 and $12, respectively.

An investor creates a bear spread by selling (writing) the call with a strike of $70 and buying the call with a strike of $87.

For what range of prices of the underlying asset does the investor make a positive profit?

Answer rating: 100% (QA)

1 To determine the maximum price of the call option that will make the product viable for the bank we need to calculate the present value of the princ... View the full answer