Below is a chart with profit/loss on the vertical axis, and the $/£ exchange rate on the horizontal axis.  The solid line shows the profit/loss schedule for a:     Question 8 options:   put option in isolation (e.g. used for speculating that the pound will depreciate)   None of the above   covered call option (a call option is used as a hedge)   covered put option (a put option is used as a hedge

4. Answer the following questions on exotic options: (a) Discuss the differences between a combination and a spread when constructing portfolios of options. (b) Define a long strangle and represent the profit function. (c) Design a forward contract on a stock with a particular delivery price and delivery date as a combination of options on the same underlying asset.

Select all of the following statements that accurately compare or contrast forwards and options:   Group of answer choices   Taking naked long positions in either a call or forward will lead to an overall long position in the underlying security.   Options and forwards always have identical payoffs if the spot price remains the same.   Both options and forwards can be used to reduce exposure to foreign exchange risk.   Going long a naked put option and going short a naked forward both cause unlimited liability.   Both options and forwards require the payment of a premium at the initiation of the contract.   Forward contracts impose obligations on both parties in the transaction. Options contracts only impose an obligation on one party.

h) discuss the relationship between the prices of puts, calls, and forward/futures contracts on the same underlying asset using the put-call-forward/futures parity.      i) discuss the boundary conditions on the prices of American and European call option contracts on futures.       j) explain and discuss the use of interest rate parity in pricing foreign currency forwards and futures.      k) describe how spot prices are determined using the cost-of-carry model.