Question: Problem 1 - Option (20 marks) 1. Why would a financial institution holding the stock of AIG Co. consider buying a put option on that

Problem 1 - Option (20 marks) 1. Why would a financial

Problem 1 - Option (20 marks) 1. Why would a financial institution holding the stock of AIG Co. consider buying a put option on that stock rather than simply selling it? (5 marks) 2. A call option on Illinois stock specifies an exercise price of $38. Today, the stocks price is $40. The premium on the call option is $3. Assume the option will not be exercised until maturity, if at all. Complete the following table: (5 marks) Assumed stock price at the maturity Net profitlloss per share to be earned by writer (seller) of call option 37 39 41 43 3. Explain why greater volatility or a longer term to maturity leads to a higher premium on both call and put options. (5 marks) 4. In order for a derivatives market to function most efficiently, two types of economic agents are needed: hedgers and speculators. Explain briefly

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