Q3 1) Option trading strategy (8 marks)

Jacob wrote one call option and one put option on FFC Corp shares. These two options have the sameexercise volume and expiration date, but different exercise prices. Both options are European options. Information on the options can be found in the table below:

Option Type	Exercise Price	Premium
Call	28	$1.20
Put	24	$1.80

a). What is the maximum profit of this trading strategy? Is there a maximum loss? Explain. (4 marks)

b). What is the profit/loss of this trading strategy if share price of FFC Corp is $20 at maturity? (2 marks)

c). At what share price(s) will Jacob break even on this trading strategy at maturity? (1 marks)

d). What must be Jacob's expectation of the share price of FFC Corp, given his investment strategy? (1 mark)

Q3 2) Futures (4 marks)

A 1-year futures contract on a non-dividend-paying share is currently traded at $26. The market price of the underlying share is $25. The risk-free rate is 6%.

a). What should the futures price be based on non-arbitrage spot-futures parity? (1 mark)

Answer rating: 100% (QA)

a To calculate the maximum profit of Jacobs trading strategy we need to consider the call and put options separately For the call option Maximum Profi... View the full answer