Reference no: EM131550863

Please this is an actual testt. I need the answer within an hour. Please do not take it if you cannot do it within an hour. 2 problem question. Please type the answer in word at attach please. Thanks

1. Horizon Builders'common stock is currently selling at $30. You estimated that ithas a standard deviation of 0.3. Assume the risk-free interest rate is 4 percent per year.

a) What is the maximum you would pay for a 26-week put option with an exercise price of $35 on Horizon Builders'stock? There are 52 weeks in a year.

b) If you can't sell a share short, you can achieve exactly the same final payoff by a combination of risk free bonds and options. What is the combination? Please describe in words.

2. Consider the following options on Goldie Penn' stock with current price of $120. Assume you have enough money in your brokerage account to cover the margin required to write calls and puts.

Type               Exercise price             Option premium per share

Call                             $115                           $9.20

Put                              $120                           $4.50

Call                             $125                           $3.70

a) How much is required (or received) UP FRONT if you buy 100 shares of calls with $115 exercise price, sell 200 shares of puts with $120 exercise price, andsell 100 shares of calls with $125 exercise price?

b) What would be your net profit or loss for your portfolio in (a) if the stock price is $117at maturity date?