Explain why margin accounts are only required when clients write
. 1.Explain why margin accounts are only required when clients write options but not when they buy options?
. 2.Compare and contrast a bull spread using calls and a bull spread using puts. If you want to include in your explanation a graphical representation of the payouts and/or profits feel free to do so.
. 3.Price a European Call & Put and an American Put on a stock that is currently selling at $25 and has a volatility of 25%. The options all have a life of 7 months and a strike price of $26. The 7-month risk free rate is 3%
per annum with continuous compounding.
a.Use a 9-step binomial tree to price all 3 options
b. Use a 10-step binomial tree to price all 3 options
c.Use the Black-Scholes-Merton formula to price the European options
4.Use the information in question 1, but now the stock will pay a dividend of $1 in 3 months from today. European Call & Put and American Call & Put using a 7-step binomial tree for each option.