a.
To draw: A Payoff diagram using a butterfly spread strategy.
Introduction:
Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.
Butterfly Spread Strategy: It is supposed to be a neutral strategy and consists of a combination of two spreads i.e, the bull spread and a bear spread. It is a strategy that results in limited profit and limited risk options. It allows three striking prices that can be constructed using the 4 options (call and put options).
b.
To draw: A Payoff diagram using vertical combination and given information.
Introduction:
Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.
Vertical Strategy: It is supposed to be a strategy in which the sale and purchase of 2 options take place simultaneously. The options may have the same expiration date and different strike prices.
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EBK INVESTMENTS
- Calçulate the net position from a single strategy that consist of one contract a, one contract b and two contract c. Here are the contracts specification: Contract a: Purchase of a call with strike price of $105 and a premium of $3. Contract b: Purehase of a put with a strike price of $95 and a premium of $7: Contract c: Writing a call with a strike price of $100 and a premium of $4.arrow_forwardPut–Call Parity - A put and a call have the same maturity and strike price. If they have the same price, which one is in the money? Prove your answer and provide an intuitive explanation.arrow_forwardAssume that price of a USDINR call option is quoted as INR 0.25 / 0.27 (bid price / ask price). Given this quote, at what price could a company buy the call option?arrow_forward
- Consider a call and a put options with the same strike price and time to expiry. Given that the strike price is exactly equals to the forward price, then: A. Put and call have same premium B. The premium of the put is equal to the forward price C. The premium of the put is equal to the premium of the call plus the present value of the strike D. The premium of the call is equal to the forward pricearrow_forwardA trader wants to form a position by combining two different European calls and two different European puts. The calls have the same expiration dates but have different strike prices. The trader sells one call with strike price of £48 at a price of £1.50, and buys one call with strike price of £50 at £1.00. He buys one put at a strike price of £48 at £0.50 and sells one put at a strike price of £50 at £2.50. Demonstrate how to graph the profits from this spread strategy by first producing a profits table, and then sketching the graph.arrow_forwardUse the put-call parity relationship to demonstrate that an at-the-money call option on a nondividend-paying stock must cost more than an at-the-money put option. Show that the prices of the put and call will be equal if S0 = (1 + r)T..arrow_forward
- (a) Elucidate price and output determination under any two non-collusive models of Oligopoly. (b) Consider a market structure comprising two identical firms (A and B), each with the cost function given by: Ci = 30Qi , where Qi for i = {A, B} is output produced by each firm. Market demand is given by: P = 210 − 1.5Q, where Q = QA + QB (i) Find Cournot equilibrium. (ii) What will be the outcome if the firms decide to collude? Compare it with the results under the Cournot equilibrium.arrow_forwardYour options trading strategy involves buying a European put with a strike price of ₺10 for ₺0.50 and aEuropean call with a strike price of ₺25 for ₺0.75 and selling a European put with a strike price of ₺15 for₺1.25 and a European call with a strike price of ₺20 for ₺1.50. The expiry date and the underlying asset isidentical for each of the four options. Draw the profit diagram for this strategy and indicate the maximumprofit/loss levels and break-even price levels. Show the details of your intermediate calculations.arrow_forwardA 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.arrow_forward
- Using the attached option pricing model and related data K = 45; St = 40 t = 4/12; r =03; SD/σ = 0.4; N = 0.07, calculate the value of the call optionarrow_forwardif the volatility was reduced to 10.500% when the spot rate fell to $1.2483=€1.00 ? The same call option cost if the volatility was reduced to 10.500% when the spot rate foll $1.2483=€1.00 would be ◻ Data tablearrow_forwardAn investor wants to follow a spread strategy by buying a put for 6$ with a strike price of 95$ and writing a put for 4$ with a strike price of 90$. a. Draw the graph of strategy payoffs and profits b. Find the equilibrium price of this strategy (the equilibrium price is the market price of the stock where the profit is 0) c. What is the maximum profit and loss from this strategy?arrow_forward
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning