1. Assume you sell 100 shares of Larson Corporation short at $61. You also buy a 60 call option for $3.5 to protect against the stock price going up.

(A). If the stock ends up at $80, what will be your overall gain or loss?

(B). If the stock ends up at $40, what will be your overall gain or loss?

(C). What is the most you can lose under this short sale-call option plan?

(D). If you have an unprotected short sale position (no call option), what is the most you could lose?

2. (a.) You invest in the Canadian Equity market and you lose 20 percent (quoted in Canadian dollars). In the meantime the United States dollar declines by 5 percent against the Canadian dollar. What is your percentage gain or loss translated into dollars?

(b.) What if the United States dollar declines by 10 percent against the Canadian dollar, what would be your percentage gain or loss translated into dollars?

3. The treasurer of the Atlas Corporation, Wanda Zinke, is going to bring a $10 million issue to the market in 45days. It will be a 25-year issue. The interest rate environment is highly volatile, and even though interest rates are currently 10.25 percent, there is a fear that interest rates will be up to 11 percent by the time the bonds get to the market.

(A). If interest rates go up by ¾ point, what is the present value of the extra interest this increase will cost the corporation? Use an 11% discount rate and disregard tax considerations.

(B). Assume the corporation is going to short September Treasury bonds at 105 3/32 (hint: 105.09375%). How many contracts must the corporation sell to equal the $10 million exposed position (Hint: Treasury bonds trade on units of $100,000? Round to the nearest whole number of contracts.

(C). Based on your answer in part (B), if Treasury bond prices increase by 2.8 percent of par value in each contract in response to an unexpected ½ point decline in interest rates over the next 45 days, what will be the total dollar loss on the future contracts?