Question 1: Assume you are faced with an opportunity made up of three equally likely outcomes. If the first outcome occurs, you receive $30. If the second outcome occurs, you receive no money. If the third outcome occurs, you must pay out $3. Given that you can be characterized as risk neutral, how much would you pay to take this risk? Would you be willing to pay more or less for this opportunity? Explain.
Question 2: Explain how you could achieve the same or similar results of short selling a stock without using equities. What set of investments would allow you to replicate the same type of upside and downside exposure?
Question 3: In considering either a covered call or a protective put:
a) Why would you use one versus the other to protect against an existing equity holding? How do each behave in a bullish or bearish market (or stock movement)? What factors will affect the decision to choose one versus another?