let m = 6

n= m+ i where i = -5m more than equal 10

5m

Question 2 (10 marks) An equity index currently has a value of Sy = 1500+m. A European call option on the index is currently priced at 150+m. The option has a strike price of 1,510 and expires in n+m months. Assume that no dividends are paid on the shares underlying the index and the continuously compounded risk-free interest rate is 2.5% per annum. (a) Calculate the implied volatility of the index to the nearest 1%. (5 marks) (b) You purchased one call option and short one (n+m)-month forward contract on the index. For index value that ranges from 1000+m to 2000+ m with a price increment of 20 for each step, calculate the payoffs of the call option and the forward contract. Hence, calculate your total payoff at the end of n+m months. (4 marks) (c) At what range of stock prices would there be a positive total payoff? (1 mark) Question 2 (10 marks) An equity index currently has a value of Sy = 1500+m. A European call option on the index is currently priced at 150+m. The option has a strike price of 1,510 and expires in n+m months. Assume that no dividends are paid on the shares underlying the index and the continuously compounded risk-free interest rate is 2.5% per annum. (a) Calculate the implied volatility of the index to the nearest 1%. (5 marks) (b) You purchased one call option and short one (n+m)-month forward contract on the index. For index value that ranges from 1000+m to 2000+ m with a price increment of 20 for each step, calculate the payoffs of the call option and the forward contract. Hence, calculate your total payoff at the end of n+m months. (4 marks) (c) At what range of stock prices would there be a positive total payoff? (1 mark)