Today's prices of 6-month call option on stocks XYZ Current price of the stock, S(t), is $50 Call Call Call Expiration 6 months 6 months 6 months Strike $50 $60 $70 Option Price $5.50 Sell (write) 2 $60-strike calls Buy 1 $70-strike call $3 $1 Considering buying an option "butterfly spread" on XYZ. This consists of: Buy 1 $50-strike call Implied vol 40% 35% 32% a) What would you pay or get paid to establish this butterfly spread? b) Plot the payoff of this option as a function of S(T), the terminal price of the stock. X-axis is S(t) and y-axis is payoff c) Only the price for 3 different 6-month option on XYZ. Why can we say, "The information give suggest that the 6-month volatility skew on XYZ is downward sloping"? Can we be 100% certain that lower-strike 6-month options (For instance, out of the money puts) would trade at higher vols? d) What do we mean by the "total delta" of this option portfolio

Today's prices of 6-month call option on stocks XYZ Current price of the stock, S(t), is $50 Call Call Call Expiration 6 months 6 months 6 months Strike $50 $60 $70 Option Price $5.50 Sell (write) 2 $60-strike calls Buy 1 $70-strike call $3 $1 Considering buying an option "butterfly spread" on XYZ. This consists of: Buy 1 $50-strike call Implied vol 40% 35% 32% a) What would you pay or get paid to establish this butterfly spread? b) Plot the payoff of this option as a function of S(T), the terminal price of the stock. X-axis is S(t) and y-axis is payoff c) Only the price for 3 different 6-month option on XYZ. Why can we say, "The information give suggest that the 6-month volatility skew on XYZ is downward sloping"? Can we be 100% certain that lower-strike 6-month options (For instance, out of the money puts) would trade at higher vols? d) What do we mean by the "total delta" of this option portfolio

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 1P

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