Question 7 (10 marks)

a) Explain the difference between a long position in a call and a short position in a put. (2 marks)

b) A trader sells a call option with a strike price of $45 for $6. What is the traders maximum gain and maximum loss? (2 marks)

c) A trader enters into a long forward contract on 100 million yen. The forward exchange rate is $0.0080 per yen. How much does the trader gain or lose in dollars if the exchange rate at the end of the contract is

i) $0.0072 per yen? (1 mark)

ii) $0.0093 per yen? (1 mark)

d) You own a put option on a Brambles share with an exercise price of $12. The option will expire in exactly six months time.

i) If the share is trading at $9 in six months, what will be the payoff of the put? (1 mark)

ii) If the share is trading at $18 in six months, what will be the payoff of the put? (1 mark)

iii) Assuming that the option costs $0.50, draw a profit diagram showing the profit of the put as a function of the share price at expiration. (2 marks)