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Q$1$: An investor holds $100$ shares of company ABC. He bought the stock at $BD\mathrm{.}20$ one year

ago, and the shares are now trading at BD$.30.$ The investor is concern about the softening

market. He is not willing to sell the stock, but he would like to protect the profit he made. He

decides to hedge his position by buying $100$ put on ABC. The $3$ months put carried a strike

price of BD$.30$ and currently trading at BD$.1$

a$)$ How much profit or loss will the investor make on this deal $($protective put$)$ if the price

of ABC stock declines to BD$.10$ per share by the expiration date? $(2$ Marks$)$

b$)$ How would he do if the stock price went up to BD $40$ per share by the expiration date?

$(2$ Marks$)$

Q$2$: Zahra Ali is a financial analyst with Seera Bank. She believes the price of ABC stock will

fall in the near future. The stock is currently trading at BD $20$ a share. She collects the following

information from the option market:

a$)$ Based on Zahra expectation, should she buy call or put option? $(1$ Mark$)$

b$)$ What is Zahra's breakeven price on the option purchased in part a$)?(1$ Mark$)$

c$)$ Using your answer from part a$),$ what is Zahra gross profit and net profit if the market

price is $25$ at the end of period? $(1$ Mark$)$

d$)$ Using your answer from part a$),$ what is Zahra gross profit and net profit if the market

price is $15$ at the end of period? $(1$ Mark$)$

e$)$ Draw a graph shows Zahra gross profit and net profit and clearly identify breakeven

price, in the money, at the money and out of the money area $(2$ Marks$)$

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