1.Draw and explain the payoff pattern for a naked call from the point of view of a writer of the call.?

2.(DOUBLE CREDIT - 2 POINTS)

a.Where the left and right tic-marks are exercise prices 60 and 80, respectively, explain how the "strangle" payoff above can be created with a put and call.

b.Suppose that the price variance of the underlying security rises.What happens to the payoff pattern from the point of view of a prospective purchaser of the put and call. Explain.

3.*(DOUBLE-WEIGHT)Consider the following "portfolio:" buy a call at the premium Vc 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.

10. The price of a stock is currently $100 per share.The premium on a European put on this share at exercise price $100 ("on the money") is $5 per share.

(a) Suppose an investor purchases this stock and buys a put option for each share she buys.Draw the profit "profile" (profits that would result from every possible stock price outcome by the expiration date of the option).Explain.

(b) Compare this pattern with the pattern that results from buying a call option on this stock at the same exercise price.Which is better, the call option or the position in (a)?Explain.