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Short position-calls-puts-portfolio insurance

Problem 1. If you have a short position on a call option with a strike price of $53.50 and the stock price is $55.50 at the expiration date and the holder of the option exercise the option, what will be the result to you?

a. You can cancel the transaction because the strike price is less than the stock price.

b. You can buy the stock for $53.50 and sell it for $55.50 and make a profit of $2.00.

c. You will have to purchase the stock at the market price ($55.50) and sell the stock at the strict price for a loss of $2.00.

d. You can renegotiate the strike price.

Problem 2. Describe call and put options, and explain why someone would want to deal in options rather than in the underlying asset.

Problem 3. Portfolio insurance can be arranged in several ways. An investor can purchase a call and a protective put to guard against a greater than expected decline in the value of the underlying security. An investor can also buy actual insurance that pays the investors if the investment does not result in an expected return. An 'investor' can even buy insurance that will pay if an investment that the 'investor' did not actually make does not result in the expected return. All of this is presently perfectly legal, but does it make any sense that I can buy insurance on a risk that I do not actually have because I did not actually make the investment that is insured?

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## Q : Determine the optimal risky portfolio

Determine the optimal risky portfolio if the risk-free rate is 3%.