Problem $1\mathrm{.}15.$

It is May and a trader writes a September call option with a strike price of $$20.$ The stock price

is $$18,$ and the option price is $$2.$ Describe the investor's cash flows if the option is held until

September and the stock price is $$25$ at this time.

Problem $1\mathrm{.}20.$

A trader enters into a short forward contract on $100$ million yen. The forward exchange rate is

$$0\mathrm{.}0080$ per yen. How much does the trader gain or lose if the exchange rate at the end of the

contract is $($a$)$ $$0\mathrm{.}0074$ per yen; $($b$)$ $$0\mathrm{.}0091$ per yen?

Problem $1\mathrm{.}24$

A trader buys a call option with a strike price of $$30$ for $$3.$ Does the trader ever exercise the

option and lose money on the trade. Explain.

Problem $1\mathrm{.}27$

Trader A enters into a forward contract to buy an asset for $$1000$ an ounce in one year. Trader

$B$ buys a call option to buy the asset for $$1000$ in one year. The cost of the option is $$100.$ What

is the difference between the positions of the traders? Show the profit as a function of the price of

the asset in one year for the two traders.

Problem $1\mathrm{.}31$

A U$.$S$.$ company knows it will have to pay $3$ million euros in three months. The current exchange

rate is $1\mathrm{.}1500$ dollars per euro. Discuss how forward and options contracts can be used by the

company to hedge its exposure.