a) Plot the payoff and profit of the following options based strategy: Buy 3 puts with strike 100, sell 4 puts with strike 110 and buy 1 put with strike 140. Explain all your calculations. b) If the price of the put with strike 100 is $8 and the price of the put with strike 140 is $16, what can you say about the price of the put with strike 110? Explain
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- A firm has three investment alternatives. Payoffs are in thousands of dollars. a. Using the expected value approach, which decision is preferred? b. For the lottery having a payoff of 100,000 with probability p and 0 with probability (1 p), two decision makers expressed the following indifference probabilities. Find the most preferred decision for each decision maker using the expected utility approach. c. Why dont decision makers A and B select the same decision alternative?Consider a decision maker who is comfortable with an investment decision that has a 50% chance of earning $25,000 and a 50% chance of losing $12,500, but not with any larger investments that have the same relative payoffs. Write the equation for the exponential function that approximates this decision maker’s utility function. Plot the exponential utility function for this decision maker for x values between –20,000 and 35,000. Is this decision maker risk-seeking, risk-neutral, or risk-averse? Suppose the decision maker decides that she would actually be willing to make an investment that has a 50% chance of earning $30,000 and a 50% chance of losing $15,000. Plot the exponential function that approximates this utility function and compare it to the utility function from part (b). Is the decision maker becoming more risk-seeking or more risk-averse?Option traders often refer to “straddles”.” Here is an example: ∙ Straddle: Buy one call with exercise price of $100 and simultaneously buy one put with exercise price of $100. Price of the call option is $15 and price of the put option is $10. Draw the position diagram for the straddle.
- A call option with a strike price of $50 costs $2. A put option with a strike price of $45 costs $3. Construct the profit table and graph from buying these two together. This strategy is called Strangle. Explain why would an investor invest in a Strangle.One day, Alice and Bob observe the following option prices (assume no bid-ask spread and r=0): 95C@6.30, 105C@3.10, 110C@1.00. Alice says that one can make some guaranteed profit by buying one 95C, selling three 105C and buying two 110C. But Bob says he read that writing (selling) call options exposes one to the risk of unlimited loss. Draw the PNL diagram for the spread suggested by Alice to see who is correct.A game of chance offers the following odds and payoffs. Each play of the game costs $200, so the net profit per play is the payoff less $200. Probability Payoff Net Profit 0.30 $400 $200 0.60 300 100 0.10 0 –200 1. What is the expected cash payoff? Note: Round your answer to the nearest whole dollar amount. 2. What is the expected rate of return? Note: Enter your answer as a percent rounded to the nearest whole number. 1.What is the variance of the expected returns? Note: In the calculation, use the percentage values, not the decimal values for the rates of return. Do not round intermediate calculations. Round your answer to the nearest whole number. 2.hat is the standard deviation of the expected returns? Note: Enter your answer as a percent rounded to 2 decimal places.
- A trader buys a call option with a strike price of $45 and a put option with a strike price of $40. Both options have the same maturity. The call costs $4 and the put costs $5. Draw a diagram showing the variation of the trader’s profit with the asset price.A trader buys a call option with a strike price of $45 and a put option with a strike price of $40. Both options have the same maturity. The call costs $3 and the put costs $4. Draw a diagram showing the variation of the trader’s profit with the asset price. Please do not copy/paste other responses that are provided elsewhere.Suppose that you sell for 8 dollars a call option with a strike price of 45 dollars, and you sell for 13 dollars each two put options with a strike price of 55 dollars. What is the minimum stock price at the exercise date that will result in you breaking even? Don't use Excel and chatgpt
- An organization is presented with a choice of two investment options. Option A has a 60% chance of making a profit of ₱300,000 and a 40% chance of incurring a loss of $500,000. Option B has a 70% chance of making a profit of ₱200,000 and a 30% chance of incurring a loss of ₱250,000. What is the expected profit/loss for Option A? (Put parenthesis if negative What is the expected profit/loss for Option B? (Put parenthesis if negative)What is the difference between a strangle and a straddle? A call option with a strike price of R1100 costs R50. A put option with a strike price of R1000 costs R55. Explain how a strangle can be created from these two options. What is the pattern of profits from the strangle?An investor buys a 6-month European call option with an exercise price of $35 for $6, and sells a 6-month European call option with an exercise price of $40 for $4. a) What kind of a spread does this strategy create? Answer in terms of “Bull Spread” versus “Bear Spread”. b) Calculate both the total payoff and profit on this strategy at the expiration of the options. Please use a Table (as in the class notes) to identify the payoff and profit.