Problem 1.1
Answer in Textbook

Problem 1.8.
Suppose you own 5,000 shares that are worth $25 each. How can put options be used to provide you with insurance against a decline in the value of your holding over the next four months?

You should buy 50 put option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be less than $25, you can exercise the options and sell the shares for $25 each.

Problem 1.14.
Suppose that a June put option on a stock with a strike price of $60 costs $4 and is held until June. Under what circumstances will the holder of the option make a gain? Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a short position in the option depends on the stock price at the maturity of the option.

The seller of the option will lose if the price of the stock is below $56.00 in June. (This ignores the time value of money.) The option will be exercised if the price of the stock is below $60.00 in June. The profit as a function of the stock price is shown in Figure S1.2.

[pic]

Figure S1.2 Profit from short position In Problem 1.1

Problem 1.19.
“Options and futures are zero-sum games.” What do you think is meant by this statement?

The statement means that the gain (loss) to the party with the short position is equal to the loss (gain) to the party with the long position. In total, the gain to all parties is zero.
Problem 4.1
Answer in text book http://www.eeweb.com/toolbox/calculator Problem 4.5
Zero rates for the following maturities are as below in continuous compounding rates. Find the forward interest rates for the second, third, fourth, fifth, and sixth quarters
Maturity Rate
3 8.0
6 8.2
9 8.4
12 8.5
15 8.5
18 8.7

Answer:
Qtr2: 8.4%
Qtr3: 8.8%