1. You bought a call option on with an exercise price of $2 and you paid $0.08/ as premium. At the same time, you sold a put on with an exercise price of $2 and you received $0.10/ as premium.

a. Please draw the combined profit graph. Show all appropriate numbers.

b. What is the name of this strategy?

c. What is the break-even point?

d. What is your profit/loss if S_T = $1.97/?

e. What is your profit/loss if S_T = $1.99/?

f. What is your profit/loss if S_T = $2.10/?

2.

a. I have a long position in a put option on with an exercise price of $2.2/ and a long position in a call option on with an exercise price of $2.4/. I paid $0.10/ for each option. Draw the combined graph. What is the name of this strategy?

b. I have a short position in a put option on with an exercise price of $2.2/ and a short position in a call option on with an exercise price of $2.4/. I received $0.15/ for each option. Draw the combined graph. What is the name of this strategy?

c. If I have both of these strategies together (part a and part b), how will my combined (4 options) graph look like? What is my loss/profit if ST = $1.8/? What is my loss/profit if ST = $2.5/?

d. Did I make a good or a bad decision when I combined both strategies? What is the advantage or disadvantage of combining these two strategies?

3. You are expecting the $/ exchange rate to go down in the future. At the same time, you are willing to accept a small return in exchange for eliminating the risk of losing too much if the rate goes up. In other words, you want to devise a strategy that gives you a small return if the exchange rate goes down and a small loss if the rate goes up. You are considering a combination of some the following basic positions: long , short , long call, short call, long put, short put (all on ). What should you do?

Hint: The answer is a combination of just a few of these 6 basic positions.

4.. You have the quotations for the following positions:

a. long or short (current rate is $2.1/)

b. long or short call (exercise price is $2.1/, the premium is $0.05/ for both long and short)

c. long or short put (exercise price is $2.1/, the premium is $0.03/ for both long and short)

Is there an arbitrage opportunity here? In other words, can you make a profit without taking any risk? Show me the graphs and the appropriate numbers.