a) You write a 6-month put option on a stock index with strike 100 for 2.42. If the annual effective rate is 4%, what is your maximum possible gain? What is your maximum possible loss?
b) Is the position in part (a) a short position or a long position? Why?
c) Suppose the 6-month effective rate is 2%, the price of wheat today is $4.90, and you buy a 6-month put with strike $5 for $.50, along with a bushel of wheat. What is the payoff for this position if the price of wheat in 6 months is $6? $4.50? How about the profit for these two values? Compare these with the payoff and profit on a 6-month wheat call option with strike $5 that also costs $.50.
d) Suppose we have the wheat options above and we sell wheat short at 4.90 and buy a 6-month call. What is the payoff for this position if the price of wheat in 6 months is $6? $4.50? How about the profit for these two values? Compare these with the payoff and profit on the 6-month wheat put option.
e) Why would you write a covered call? How about a covered put?