1. A trader has a put option contract to sell 100 shares of a stock for a strike price of $60. What

is the effect on the terms of the contract of the following?

a. A $2 dividend being declared.

b. A $2 dividend being paid.

c. A 5-for-2 stock split.

d. A 5% stock dividend being paid.

2. An investor buys a European put on a share for $3. The stock price is $42 and the strike price is $40. Under what circumstances does the investor make a profit? Under what circumstances will the option be exercised? Draw a diagram showing the variation of the investors profit with the stock price at the maturity of the option.