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5. The price of a stock is $40. The price of a one-year European put option...

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Finance

5. The price of a stock is $40. The price of a one-year Europeanput option on the stock with a strike price of $30 is quoted as $7and the price of a one-year European call option on the stock witha strike price of $50 is quoted as $5. Suppose that an investorbuys 100 shares, shorts 100 call options, and buys 100 put options.a. Construct a payoff and profit/loss table b. Draw a diagramillustrating how the investor’s payoff and profit or loss atexpiation.

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We are given the following informationSecurityStockCallPutPrice4057Strike Price5030Position100100100We are long the stock and the put and short the call soposition 100 for stock and put is positive and 100 for callIf the price of stock is lower than 40 then we will make a lossas we purchased for 40 and if the price is higher than 40 then wegainNow if the price at the time of expiry is greater than 50 thenthe call buyer will exercise it but otherwise we will pocket thepremiumIf the price is below    See Answer
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5. The price of a stock is $40. The price of a one-year Europeanput option on the stock with a strike price of $30 is quoted as $7and the price of a one-year European call option on the stock witha strike price of $50 is quoted as $5. Suppose that an investorbuys 100 shares, shorts 100 call options, and buys 100 put options.a. Construct a payoff and profit/loss table b. Draw a diagramillustrating how the investor’s payoff and profit or loss atexpiation.

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