Answer question 3 only please. Please try to be specific. Thank you.

Prof. PIRIM Spring 2016, Session II Options and Futures I (BusFin 4230 ) Problem Set 3: Strategies by using call or/and put option This problem set is due at the beginning of class on Thursday, April 7th, 2015. Hand in only one solution per group. Question 1 (5 Points) Use put-call parity to relate the initial investment for a bull spread created using calls to the initial investment for a bull spread created using puts. Question 2 (10 Points) European call option and put option on a stock both have strike price of $20 and an expiration date in 3 months. Both sell for $3 (call and put premiums). The risk- free interest rate is 10% per annual, the current stock price is $19, and a $1 dividend is expected in 1 month. Identify the arbitrage opportunity opens to a trader and also calculate the risk-free profit. Question 3 (10 Points) Telco installs telecommunications equipment uses copper wire from a company called Wirco as an input. Wirco sells copper wire for the price of copper plus $5. For planning purposes, Telco assigns fixed revenue of $6.20 for each unit of wire it uses. The 1-year forward price of copper is $1/lb. The 1-year continuously compounded interest rate is 6%. In your answers, at a minimum consider copper prices in 1 year of $0.80, $0.90, $1.00, $1.10, and $1.20. 1 One-year option prices for copper are shown in the table below. Strike Call Put 0.95 $0.0649 $0.0178 1.00 $ 0.0376 $0.0376 a) Compute the estimated profit in 1 year if Telco sells a put option with strike of $0.95. Draw the profit diagram. b) Compute the estimated profit in 1 year if Telco sells collars with the following strikes: $0.95 for the put and $1.00 for the call option. 2