Problem Set 7

1. (20 pts)

On a recent day, Microsoft stock (symbol: MSFT) was at $25. Assume the nearby MSFT 25 call was selling for $1. Draw a hockey stick diagram for a long position in the MSFT 25 call.

2. (40 pts)

If the MSFT 24 call is selling for $2.50, and the MSFT 25 call is selling for $1, construct a bull spread using these nearby 24 and 25 calls.

a. (20 pts)

Construct a table like the ones we did in class showing profit and loss at relevant stock prices for each part of the spread, and the net profit or loss for the entire spread position.

b. (20 pts)

Draw a hockey stick diagram for the spread, clearly labeling all the critical points.

3. (40 pts)

Consider a