Problem $1$

Options can be used in combination with stocks to reduce risk or to produce income. Buying protective

puts guards against downside risk while allowing for upside potential. Writing covered calls allow investors

to earn premium income on a stock they expect to remain stable in price.

WFX Ltd$.$ has a current stock price of $$80$ and does not pay dividends. European call option on the stock is

priced $$17\mathrm{.}29$ and European put option is priced $$2\mathrm{.}23,$ for $100-$share contracts expiring in $9$ months, at a

strike price of $$70.$

What is the total cost of buying a protective put? $2$ point

What is the total cost of writing a covered call? $2$ point

What will be the payoff and profit of the protective put if the stock price on maturity is $$60,$$$70,$

$$80,$$$86?4$ points

What will be the payoff and profit of the covered call if the stock price on maturity is $$60,$$$70,$

$$80,$$$86?4$ points