Background:

In $1976$ Australia established its first equity options market after Chicago in $1973.$ Some important aspects of

option specification to note are the underlying parcel is $1,000$ shares for stock options and $10$ times the index

level for index options. The prices are quoted in cents per share for stock options and points per contract for

index options. The exercise requires the delivery of stock options and cash settlement for index options. You

are a trader in the Australian stock market interested in owning shares in Xero Limited. XERO is a technology

company based in New Zealand that offers cloud$-$based accounting software primarily to small and medium$-$

sized businesses. It's one of the top technology stocks on the ASX and is widely regarded for its growth and

market presence with over a million subscribers in Australia and New Zealand. Over the past five years, XERO's

stock price has peaked at $$154$ after rising from below $$63.$ Recently, the stock price has fallen to $$125.$ This case

study explores the pricing of derivative contracts and the implications of price volatility on financial instruments

particularly for XERO stock.

Question $1.$

Based on your recent analysis and information from your friend in Manhattan investment firm

observed that the XERO stock price is expected to rise by $7\%.$ Currently, it is trading at

USD$$76.$ You feel buying a JUNE option contract $($refer to Table $1)$ would be sufficient time for

the market expectation to be realized. Assume that each contract covers $1,000$ shares.

Table $1$: Option Price for XERO

${?}^{**}$ All prices are quoted in USD. Maintain all computations in USD

This contract is referred to as XERO.

Pls Answer:

a$)$ If you decide to exercise his option, present with clear workings only ONE possible trade

outcome for the trader in dollars and percentage and the real value of the option.

$(5$ marks$)$

b$)$Your friend, who works in an investment strategy department in Manhattan, poses a

challenge: $"$Do option strategies yield profits under volatile market conditions?" To respond

to his question, briefly share your perspective $($not more than $50$ words$)$ and only list two

option strategies that can substantiate your view.