1. A portfolio we have talked about recently consists of (1) buying a European call on a security having exercise price E and (2) simultaneously buying a Treasury security having face E (same as exercise price of the call) and discount-to-face ratio . a. What would be the payoff pattern on this portfolio? b. Explain how a dealer could short this portfolio and what the payoff pattern would be.

2. Show the possible profits on a graph of buying one call and two puts at the same strike price. Under which circumstances might this strategy be sensible?

3. Consider the following portfolio: buy a call at the premium V_c and buy a Treasury bill having price-per-face of and face of E, where E is the exercise price of the option. Now show how you would short this portfolio. What is the payoff pattern? Explain.

4. Draw the payoff pattern for buying a call at a certain exercise price. The volatility of the underlying security rises. How do you have to change your diagram for the payoff pattern? Explain.

5. Bond X has maturity of 20 years and coupon of 6%. Bond Y has maturity of 30 years and coupon of 4%. Which bond will change more dramatically in price as yields change? Why?

6. A security has a price equal to the exercise price on its European call option. Which is higher: the premium on the call with the same exercise price, or the premium on the put with the same exercise price? Explain.