1. If a particular stock does not pay dividends and is currently priced at $24 per share, what should be the price of a call option with a maturity of one year and a strike price of $24.5 if put options with the same features currently cost $2? Assume a risk free rate of 2%. (use 5 decimal places)

2. If news comes to the market that suggested that the world stock prices will encounter less variability (variance) for the coming years than in the past, what would this mean for an owner of a portfolio which is mostly composed of call and put options?

1. This is great news less variability is less risk, which will help portfolio return
2. It is unclear if this news will be beneficial or harmful to the portfolio
3. This will have no effect on the portfolio as it is immunized from volatility.
4. This will be bad news for the portfolio as it has many options within it and option values are higher when volatility is higher.

The answer is D, as options increase in value with greater volatility and with less volatility the portfolio will surely be worthless money.

1. This is great news less variability is less risk, which will help portfolio return
2. It is unclear if this news will be beneficial or harmful to the portfolio
3. This will have no effect on the portfolio as it is immunized from volatility.
4. This will be bad news for the portfolio as it has many options within it and option values are higher when volatility is higher.