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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. 

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