1. 1. Show the lower bound of the call option. 
2. 2. If the price of a warrant call on HSBC with conversion ratio =1 is $1. Assess whether the option price of a call option on HSBC, other things being equal, without dividend payment over the life of the option is larger than $1. 

3. How to use implied volatility for investment in the options markets?

4. Suppose that an investor hedges against the exchange rate risk by writing one lot of put options on 62,500 British pounds. Consider that the current exchange rate is USD1.3500 per pound, the exercise price is USD1.4000 per pound, the standard deviation is 30% per annum, the continuously compounded US and pound interest rates are 3%, and 6.0% per annum respectively, and the time to expiration is 12 months. Calculate the amount of option premium per lot that the investor will receive and show the break-even point at maturity graphically. He fears the British pound to rise or fall? 

The steps of calculation must be shown clearly. 

Answer rating: 100% (QA)

Black Scholes Merton model to calculate the prices of European call and put ... View the full answer