Question: 1. The interest rate is 2% per annum with continuous compounding and a bank wants to create a $1,000 principal protected note using a five-year

1. The interest rate is 2% per annum with continuous compounding and a bank wants to create a $1,000 principal protected note using a five-year zero-coupon bond plus a five-year call option.

What is the maximum price of the call option that will make this product viable for the bank (answer in $ and round to the nearest cent)?

2. Call options with strike prices of $70 and $87 cost $16 and $12, respectively. An investor creates a bear spread by selling (writing) the call with a strike of $70 and buying the call with a strike of $87.

What is the investor's profit at expiration if the terminal spot price turns out to be $72?

3. Call options with strike prices of $70 and $87 cost $16 and $12, respectively.

An investor creates a bear spread by selling (writing) the call with a strike of $70 and buying the call with a strike of $87.

For what range of prices of the underlying asset does the investor make a positive profit?

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