QUESTION 3: Writing options (5 points) A. You currently do not have a position in XYZ shares. The current XYZ share price is $40. You expect that the price of XYZ share will not increase in the next year. Consequently, you write a one-year European call option on 100 shares of XYZ. The option's exercise price is $45 (per share), and the premium is $3 (per share). Suppose that the riskless interest rate is zero and that XYZ does not pay dividends. Under what circumstances will you have a profit? What is your maximum possible profit? Under what circumstances will you lose? What is the break-even stock price at expiration? What is your maximum possible loss? (2 points) You currently do not have a position in XYZ shares. The current XYZ share price is $40. You expect that the price of XYZ share will not decline in the next year. Consequently, you write a one-year European put option on 100 shares of XYZ. The option's exercise price is $35 (per share), and the premium is $3 (per share). Suppose that the riskless interest rate is zero and that XYZ does not pay dividends. Under what circumstances will you have a profit? What is your maximum possible profit? Under what circumstances will you lose? What is the break-even stock price at expiration? What is your maximum possible loss? (2 points) The Options Clearing Corporation imposes initial margins and daily margin calls on option writers. In contrast, the Options Clearing Corporation does not impose any margins on option buyers. Why? (1 point)