1. A corporate treasurer is designing a hedging program involving foreign currency options.

What are the pros and cons of using (a) NASDAQ OMX

and (b) the over-the-counter market for trading?

2. Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until

maturity. Under what circumstances will the holder of the option make a profit? Under

what circumstances will the option be exercised? Draw a diagram illustrating how the profit

from a long position in the option depends on the stock price at maturity of the option.

3. Suppose that a European put option to sell a share for $60 costs $8 and is held until

maturity. Under what circumstances will the seller of the option (the party with the short

position) make a profit? Under what circumstances will the option be exercised? Draw a

diagram illustrating how the profit from a short position in the option depends on the

stock price at maturity of the option.

4. Describe the terminal value of the following portfolio: a newly entered-into long forward

contract on an asset and a long position in a European put option on the asset with the

same maturity as the forward contract and a strike price that is equal to the forward price

of the asset at the time the portfolio is set up. Show that the European put option has the

same value as a European call option with the same strike price and maturity.

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